REPORT 

OF  THE 


FEDERAL 

ELECTRIC  RAILWAYS 

COMMISSION 


TO  THE 

PRESIDENT 


AUGUST,  1920 


■^^ 


WASHINGTON 

GOVERNMENT  PRINTING  OFFICB 

1920 


:^ 


REPORT 

OF  THE 


FEDERAL 

ELECTRIC  RAILWAYS 

COMMISSION 


TO  THE 


PRESIDENT 


V 


AUGUST,  1920 


WASHINGTON 

COVEnNMKNT  I'lUNTlNG  OFFICE 

1920 


rhM^^' 


SRLi      ^- 
URL 


KEPORT  OF  THE  FEDERAL  ELECTRIC  RAILWAYS  COMMISSION. 

The  President  of  the  United  States. 

Sir:  Tlio  Fedoral  Electric  Railways  Commission  begs  leave  to 
present  the  following  report. 

Tliis  Commission  was  appointed  by  you  in  response  to  a  suggestion 
outlining  the  need  of  such  a  commission  in  tlie  following  letter  from 
two  members  of  your  Cabinet,  the  Secretary  of  Commerce  and  the 
Secretary  of  Labor: 

Washington,  D.  C,  May  15,  1919. 

Dear  Mr.  President:  The  electric-railway  problem  to  which  your  attention  has 
been  called  on  several  occasions  has  recently  assumed  such  serious  national  propor- 
tions as  to  warrant  the  prompt  attention  of  the  Federal  Government.  Already  50  or 
more  urban  systems,  representing  a  considerable  percentage  of  the  t<ital  electric- 
railway  mileage  of  the  country,  are  in  the  hands  of  receivers.  The  communities 
affected  are  among  the  most  important — New  York,  Providence,  Bul'falo,  New 
Orleans,  Denver,  St.  Louis,  Birmingham,  Montgomery,  Pittsburgh,  Memphis,  Fort 
Wayne,  Des  Moines,  St.  Paul,  Spokane,  Chattanooga. 

Other  large  systems  are  on  the  verge  of  insolvency,  for  the  industry  as  a  whole  is 
virtually  bankrupt.  The  continued  shrinkage  in  the  value  of  hundrerls  of  millions 
of  electric-railway  securities  held  by  saviiigs  banks,  national  l)anks,  life-insurance 
companies,  and  by  the  public  at  large  threatens  to  embarrass  the  Nation's  financial 
operations.  Furthermore,  the  withdrawal  of  this  industry's  bu\ing  power,  whicli 
is  said  to  rank  third  in  magnitude,  involves  the  unsettlement  of  collateral  industries, 
naturally  entailing  labor  dislocation  that  will  affect  hundreds  of  thousands  of 
employees. 

The  return  to  normal  conditions  is  being  hampered  and  the  efforts  of  the  Govern- 
ment to  avert  strained  conditions  in  finance,  labor,  and  cominerr-e  are  being  less 
fruitful  of  satisfactory  results  than  should  be  expected,  if  some  solution  of  the  electric- 
railway  problem  were  in  view. 

.  What  the  solution  is  may,  we  believe,  be  evolved  by  a  thorough  investigation  of 
general  franchise  and  operating  conditions  in  their  relation  to  rate?,  including  service- 
at-cost  plans.  State  and  municipal  taxation,  local  paving  rcciuirenients,  and  internal 
economies  that  may  be  effected. 

We  therefore  propose  and  recommend  the  appointment  by  you  of  a  Federal  board 
or  commission,  whose  duty  it  shall  be  to  study  and  report  upon  the  entire  prolilcm, 
in  order  that  the  State  and  municipal  authorities  aud-othor.s  conrerned  may  have  the 
benefit  of  full  information  and  of  any  conclusions  or  recommendations  that  may  1)e 
formulated.  Such  a  study  will,  in  our  opinion,  exert  a  helpful  and  constructive 
force  in  this  critical  period  of  the  industry's  existence  and  will  aid  in  the  readjust- 
ment. If  you  would  make  such  an  appointment  before  June  3!)  your  contingency 
fund  could  be  used  to  defray  the  expenses,  which  would  be  about  -^lO.OOO. 

The  National  Association  of  State  Commissioners  has  always  in\iled  Federal  aid 
in  this  matter  and  tlie  recent  conference  of  governors  and  mayors  adopted  a  resolu- 
tion recommending  l'"ederal  consideration  of  the  problem  of  preventing  the  financial 
disaster  threatening  this  industry. 

We  propose  that  such  a  commission  shall  be  made  up  of  one  representative  of  each 
of  the  following  groups:  Treasury  Department  or  War  Finance  Corporation,  Depart- 
ment of  (.'ommerce.  Department  of  Labor,  National  Association  of  State  Commis- 
sioners, American  Cities  League  of  I\Iayors,  Amalgamated  As.-^ocialion  of  Street  and 
Electric  Pailway  Employees,  American  Electric  Railway  Association,  Investment 
Bankers'  As.sociation  of  America. 

We  respectfully  urge  your  authorization  for  such  a  commission,  to  be  followed  by 
your  formal  proclamation  upon  the  selection  of  the  personnel. 
Cordially,  yours, 

William  C.  Redfielu, 

Secrclanj  of  Commerce. 
W.  B.  Wilson, 

Secretary  of  Labor. 

1 


2  PROCEEDINGS  OF  FEDERAL  ELECTRIC  RAILWAYS  COMMISSION". 

The  Commission  appointed  by  you  on  the  31st  day  of  May,  1919, 
consisted  of  the  following  members,  who  were  to  serve  and  have  served 
thereon  without  compensation: 

Charles  E.  Elmquist,  president  and  general  solicitor  of  the  National 
Association  of  Railway  and  Utilities  Commissioners. 

Edwin  F.  Sweet,  Assistant  Secretary  of  Commerce,  representing 
the  Department  of  Conmoterce. 

Phihp  H.  Gadsden,  representing  the  Americaij  Electric  Railway 
Association. 

Royal  Meeker,  Commissioner  of  Labor  Statistics,  Department  of 
Labor,  representing  that  department. 

Louis  B.  Wehle,  General  Counsel  of  the  War  Finance  Corporation, 
re])resenting  the  Treasiu'V  Department.  ' 

Charles  W,  Beall,  of  Harris,  Forbes  &  Co.,  New  York,  bankers, 
representing  the  Investment  Bankers'  Association  of  America. 

William  D.  Mahon,  president  of  Amalgamated  Association  of 
Street  and  Electric  Railway  Employees  of  America,  rej^resenting 
that  association. 

George  L.  Baker,  mayor  of  Portland,  Oreg.,  representing  the 
American  Cities  League  of  Ma3"ors. 

The  Commission  met  on  June  4,  1919,  in  Washington,  D.  C,  and 
organized  by  electmg  Charles  E.  Elmquist  as  chairman  and  Edwin 
F.  Sweet  as  vice  chairman,  and  subsequently  appointed  Charlton 
Ogburn  as  its  executive  secretary.  At  its  first  meeting  the  Com- 
mission announced  that  it  woukl  attempt  to  determine  the  general 
principles  which  should  govern  the  regulation,  operation,  and  service 
of  electric  railways,  but  tliat  the  Conunission  was  without  autliority 
to  hear  and  dctermme  specific  local  controversies,  and  that  it  v^-ould 
not  undertake  in  any  way  to  encroach  upon  the  functions  of  State 
commissions  or  of  municipal  authoiities;  that  the  purpose  of  the 
Conunission  was  rather  to  investigate  and  study  the  condition  of  the 
electric  railway''  industry,  mcluding  franchises,  rates,  taxation,  and 
assessments,  economies  of  operation,  public  relations,  regulation,  etc. 

The  Conunission  gathered  its  testimony  mainly  in  two  ways: 
First,  by  public  hearuigs,  at  v/hich  95  witnesses  testified  in  7;)erson 
and  21  others  sent  prepared  statements;  second,  by  a  series  of  ques- 
tionnaires sent  to  every  city  in  which  there  is  a  street  or  interurban 
railway,  addressed  to  the  electric  raihvays,  the  mayors,  chambers  of 
commerce,  and  the  central  labor  unions,  and  also  to  all  of  the  State 
public  utility/  commissions. 

The  fu'st  public  liearmg  was  held  in  New  York  on  June  19,  1919. 
The  next  hearing  was  held  in  Washington  on  July  15,  lasting  two 
weeks,  during  whicJi  time  the  witnesses  on  behalf  of  tlie  electric  rail- 
ways presented  evidence  under  the  direction  of  the  committee  of 
one  hundred  of  the  Amerir-an  Electric  Railway  Association.  The 
next  hearing  was  in  WashijTgton  beguuiiiig  August  11,  and  lasted 
one  week,  testimony  being  ofl'ered  on  behalf  of  the  public,  chiefly,  by 
representatives  of  the  municipalities  and  all  State  public  utility 
commissions.  At  the  last  hearing  held  in  Waslimgton,  beginning 
vSeptcmber  29,  and  lasting  one  week,  testimony  was  ofl'ered  by 
furtiier  witnesses  representing  the  public  ajid  by  witnesses  on  behalf 
of  labor,  represented  ])y  the  Amalgamated  Association  of  Street  and 
Electric  Railway  Employees  of  America.     Ail  of  these  hearings  ran 


PROCEEDIKGS  OF  FEDERAL  ELECTRIC  RAILWAYS  COMMISSION.  3 

tlir()iiti;li  (lay  and  ni<i;lit  sessions,  bof^inniii^  at  10  a,  m.  and  usuall.y 
continning  until  10  or  11  p.  m.,  and  totaling;  one  month. 

Ninons:  the  witnesses  were  ex-President  William  II.  Taft.  Secretary 
of  War  Newton  I).  Baker,  leading  bankers,  railway  manai'ers,  econ- 
omists, mayors,  public  utility  experts,  and  State  pul)lic  utility 
commissioners. 

The  testimony  taken  embraces  6,195  pages  of  typewiitten  tran- 
script. 

Three  separate  fjuestionnaircs  were  later  sent  out.  Tin*  fij-st  was 
general,  dealing  with  all  phases  of  the  situation.  The  last  two  were 
special,  seeking  trafllc  hgm-es,  month  by  month,  for  the  past  tliree 
years — that  is,  as  to  the  number  of  revenue  passengers,  amount  of 
passenger  revenue,  fare  charges,  and  any  occurrences  affecting  traffic, 
such  as  strikes,  influenza  epidemic,  and  the  like. 

At  the  coufdusion  of  the  final  puldic  hearing  the  Commission  en- 
gaged the  services  of  Dr.  Delos  F.  Wilcox  to  aid  in  an  dyzing  the 
testimony  gathered  and  to  ni'ike  suggestions  to  the  Commission  with 
referen^'e  to  its  report.  Dr.  Wilcox  made  a  very  comprehensive 
analysis  of  the  evidence,  containing  823  pr.ges  of  matter.  The  Com- 
mission regrets  that  it  can  not  publish  this  analysis  with  the  proceed- 
ings, since  it  represents  a  complete  and  masterful  study  of  the  whole 
electric  railway  problem.  Printed  vnth  tlie  evidence,  however,  is  a 
summary  of  the  Wilcox  report,  prepared  by  him.  The  onswers  to 
the  questionnou'es  resulted  in  bringing  to  the  attention  of  the  Com- 
mission a  great  mnss  of  information.  iVll  the  evidence,  exhibits, 
an  dysis  of  Dr.  Wilcox,  and  tabulated  summaries  of  information 
founrl  in  tiie  r.nswers  to  the  questionnaires  have* been  considered  by 
this  Corn-mission. 

The  fin  1  meeting  of  the  Commission  was  held  in  Washington  -luly 
22  to  27,  1920,  inclusive,  for  the  purpose  of  formulating  tlds  report. 

Owing  to  the  divergrnt  representation  of  its  personnel,  this  un;  ni- 
mous  report  of  the  C'ommission  necessr.rily  represents  decided  con- 
cessions by  some  of  its  individual  members. 

A  complete  report  of  tiie  testimony  will  be  printed,  together  with 
this  report,  f  nd  will  be  ph^ced  in  the  Congressional  Library  in  W^ash- 
ington  rnd  otlier  leading  librjyies  in  the  country,  w^ith  all  regulatory 
comniissions,  and  with  the  mayors  of  the  leading  cities  of  the  United 
States. 

For  convenience,  we  wish,  before  proceeding  to  om*  discussion,  to 
state  oiu'  principal  conclusions  and  recommendations,  which  arc  as 
follows : 

Section  I. 

CONCLUSIONS  AND  RECOMMENDATIONS. 

I.  The  electric  railway  furnishing  transportation  upon  rails  is  an 
essential  public  utility  and  should  have  the  sympatheti<5  understr.nd- 
ing  and  cooperation  of  the  public  if  it  is  to  continue  to  perform  a 
useful  public  service. 

II.  The  electric  railway  has  been  and  will  continue  to  be  a  publico 
utility,  subject  to  public  control  as  to  the  extent  and  character  of 
the  service  it  renders  and  as  to  the  rates  it  charges  for  sucdi  service. 


4  PROCEEDHnTGS  of  federal  electric  railways  COMMISSION". 

III.  It  is  of  the  highest  importance  that  both  the  total  cost  of  the 
service  and  the  cost  to  the  individuals  who  use  it  shall  be  kept  as  low 
as  possible  without  injustice  to  those  who  take  part  in  producing  it. 

IV.  The  electric  railway  industry  as  it  now  exists  is  without  finan- 
cial credit  and  is  not  properly  performing  its  public  function. 

V.  Tliis  condition  is  the  result  of  early  lin  'ucial  mismtm-^gement 
and  economic  causes  accentuated  b}^  existing  higli-price  levels  of 
labor  and  materials,  and  of  the  failure  of  the  uniform  unit  fare  of 

5  cents  prescribed  either  by  statute  or  by  local  frnnchiso  ordinances 
or  contracts  to  provide  the  necessary  revenues  to  pay  operating  costs 
and  to  maintain  the  property  upon  a  reasonable  basis. 

VI.  The  industry  can  be  restored  to  a  normal  basis  only  by  the 
introduction  of  economies  in  operation,  improving  the  tracks,  equip- 
ment, and  service,  and  assuring  a  reasonable  return  upon  the  fair 
value  of  its  property  used  in  the  public  service  when  honestly  and 
efhcientlv  managed. 

VII.  The  electric  railways  must  expand  to  meet  the  growing  needs 
of  their  communities ;  therefore,  the  first  essential  is  to  restore  credit 
in  order  to  obtain  necessary  new  capital  for  the  extension  and  im- 
provement of  service. 

VI EI.  Restoration  of  credit  involves  a  readjustment  of  relations 
which  will  remove  public  antagonism,  provide  public  cooperation, 
and  insure  to  the  investor  the  integrity  of  his  investment  and  a  fair 
rate  of  return  thereon. 

IX.  Eiicctive  public  cooperation  should  be  exercised  by  eliminat- 
ing, in  so  far  as  it  is  practicable,  special  assessments  for  sprinkling, 
paving,  and  for  the  construction  and  maintenance  of  bridges  which 
are  used  by  the  public  for  highway  purp  )ses. 

X.  Extensions  mto  new  territory  resulting  in  special  benefits  to 
the  property  in  that  vicinity  should  be  paid  for  by  assessments 
on  such  property  in  proportion  to  the  benefits  received,  and  the 
amount  of  such  assessment  should  not  be  added  to  the  physical 
value  of  the  corporate  property. 

XI.  The  great  increase  in  the  use  of  private  automobiles,  the 
jitney,  and  motor  busses  has  introduced  a  serious  although  not  a 
fatal,  competition  to  the  electric  railway.  These  forms  of  public 
motor  conveyance  when  operated  as  public  carriers  should  properly 
be  subject  to  equivalent  regulatory  provisions. 

XII.  The  full  cooperation  of  hibor  is  essential  to  the  highest 
prosperity  and  the  usefulness  of  the  industry.  The  employees 
engaged  in  this  occupation  should  have  a  living  wage  and  humane 
hours  of  labor  and  working  conditions.  They  should  have  the  right 
to  deal  collectively  with  their  employers,  through  committees  or 
representatives  of  their  own  selection.  All  labor  disputes  should  be 
settled  voluntarily  or  by  ar1)itration,  and  the  award  of  such  a  board 
should  be  final  and  binding  upon  both  parties.  It  is  intolerable  that 
the  transportation  service  of  a  city  should  be  subject  to  occasional 
paralysis,  whether  by  strikes  or  by  lockouts. 

XIII.  A  private  industry  should  not  be  subsidized  by  public 
funds  unless  it  is  imperatively  necessary  for  the  preservation  of  an 
essential  service,  and  then  only  as  an  emergency  measure. 

XIV.  Unless  the  usefulness  of  the  electric  railways  is  to  be  sacri- 
ficed public  control  must  be  flexible  enough  to  enable  them  to  secure 


PROCEEDIN-GS  OF  FEDERAL  ELECTRIC  RAILWAYS  C0MMISSI02T.  5 

siifficipnt  rovcniics  to  pay  the  entire  cost  of  the  service  rendered, 
includino;  the  necessary  cost  of  both  capital  and  labor, 

XV.  There  can  be  no  satisfactory  solution  of  the  electric-railway 
problem  which  docs  not  include  the  fair  valuation  of  the  property 
employed  in  the  public  service,  and  where  that  is  done  the  comj)anios 
should  voluntarily  reduce  any  excessive  capitalization  to  the  basis  of 
such  value. 

XVI.  There  is  no  insuperable  objection  to  a  large,  wide-open  city 
having  exclusive  jurisdiction  over  the  rates  and  services  of  public 
utihties. 

XVII.  The  necessity  for  scientific  and  successful  regulation  of 
systems,  whether  large  or  small,  and  especially  those  which  operate 
through  several  cities  and  villages  and  in  rural  territory,  leads  to  the 
conclusion  that  local  regulation  should  generally  be  subject  to  the 
superior  authority  of  the  State,  whether  as  a  matter  of  original 
jurisdiction  or  through  the  medium  of  appeal. 

XVIII.  Cost-of-service  contracts  are  in  the  experimental  stage, 
but  where  tried  they  seem  to  have  secnred  a  fair  return  upon  capital, 
established  credit,  and  effected  reasonably  satisfactory  public  service. 
Such  contracts  may  safely  be  entered  into  where  the  public  right 
eventually  to  acquire  the  property  is  safeguarded. 

XIX.  The  right  of  the  public  to  own  and  operate  public  utilities 
should  be  recognized,  and  legal  obstacles  in  the  way  of  its  exercise 
should  be  removed. 

XX.  Uliile  eventually  it  might  become  expedient  for  the  public  to 
own  and  operate  electric  railways,  there  is  nothing  in  the  experience 
thus  far  obtained  in  this  country  that  will  justify  the  assertion  that  it 
will  result  in  better  or  cheaper  service  than  privately  operated  utili- 
ties could  afford  if  properly  regulated. 

XXI.  Public  ownership  and  operation  of  local  transportation  sys- 
tems, whether  or  not  it  be  considered  ultimately  desirable,  is  now, 
because  of  constitutional  and  statutory  prohibitions,  financial  and 
legal  obstacles,  the  present  degree  of  responsibility  of  our  local  gov- 
ernments, and  the  state  of  public  opinion,  practicable  in  so  few 
instances,  that  private  ownership  and  operation  must  as  a  general 
rule  be  continued  for  an  extended  period. 

XXII.  If  the  reforms  incident  to  public  regulation  which  we  sug- 
gest in  this  report  should  not  result  in  making  private  ownership 
satisfactory  to  the  public,  such  reforms  should  at  least  enable  public 
OAvnership  to  be  established  upon  a  just  and  equitable  basis. 

Section  II. 
THE  STREET  RAILWAY  IS  AN  ESSENTIAL  INDUSTRY. 

The  electric  railway  industry  at  present  is  a  factor  of  essential 
importance  in  the  urban  life  and,  to  a  scarcely  less  extent,  in  inter- 
urban  relations  of  the  country. 

The  experience  of  75  years,  the  unanimous  opinion  of  expert  wit- 
nesses, and  of  those  who  are  students  of  transportation  problems,  and 
the  assumption  of  the  necessity  for  tracks  by  inventors  worldng  to 
improve  the  methods  of  street  transportation  alike  demonstrate  the 
fundamental  and  permanently  essential  nature  of  the  railway — and 
to  the  present  time  of  the  electric  railway — as  the  most  nearly  ade- 


b  PROCEEDINGS  OF  FEDERAL  ELECTRIC  RAILWAYS  COMMISSION". 

quale,  reliable,  and  satisfactory  system  available  for  transporting  the 
maximum  number  of  people  through  the  streets  of  our  cities  with  the 
least  interference  with  the  use  of  these  streets  for  other  purposes  of 
public  ways. 

The  Bureau  of  Census  Reports  for  the  year  1917  show  the  net  capi- 
talization as  of  December  31,  1917,  to  be  S4,S69,962,09G,  which  makes 
this  industry  one-fourth  as  important  as  the  steam  railroads  of  the 
country  in  point  of  capitaUzation.  The  total  mileage  in  1917  was 
44,835.'  The  net  capitalization  per  mile  of  track  is  S109,065.  The 
total  revenue  for  1917  from  railway  operations  was  approximately 
$650,000,000.  These  statistics  do  not  include  the  electrified  por- 
tions of  steam  railroads  engaged  in  suburban  service.  Approxi- 
matcl}^  40  per  cent  of  the  mileage  is  suburban  in  character. 

The  number  of  people  ^vith  whom  the  electric  railways  come  into 
daily  contact  is  shown  b}''  the  fact  that  in  the  year  1917  they  carried 
a  total  of  11,304,660,462  revenue  passengers  and  3,202,254,111  trans- 
fer and  free  passengers,  as  compared  with  a  total  of  1,066,638,474 
revenue  passengers  carried  by  the  steam  roads. 

In  spite  of  the  immense  development  of  the  automobile  industry 
the  demand  for  electric  railway  transportation  has  increased  at  a 
rapid  rate.  It  is  estimated  that  on  December  31,  1917,  there  were 
4,643,481  passenger  automobiles  and  that  two-thirds  of  the  develop- 
ment of  that  industry  was  subsequent  to  1912,  but  the  number  of 
revenue  passengers  carried  by  the  electric  railways  was  approxi- 
mately 1,800,000,000  more  in  1917  than  in  1912.  "During  the  year 
ended  June  SO,  1919,  the  total  number  of  revenue  passengers  carried 
by  the  local  transportation  lines  of  New  York  City  was  2,079,942,604, 
as  compared  with  1,402,417,642  carried  during  the  year  ended  June 
30,  1909,  an  increase  of  more  than  46  per  cent  in  10  years.  On  tho 
basis  of  the  estimated  population  served  the  nundier  of  revenue  rides 
per  capita  in  New  York  City  in  1909  was  ."04  and  in  1919,  370 — an 
increase  of  nearly  22  per  cent  in  the  riding  habit. 

In  this  connection  Mr.  Henry  G.  Bradlee,  president  of  the  Stone 
&  Webster  Corporation,  stated  in  a  letter  dated  October  1,  1919,  as 
follows : 

It  would  appear  tliat  something  lias  been  and  is  still  stimulating  the  street  railway 
husincas;  possibly  the  automobiles  themselves  have  helped  in  this  direction.  People 
may  lie  acquiring  to  a  greater  extent  than  ever  l^efore  the  riding  ha'iit  and  may  be 
more  and  more  inclined  to  move  about  and  spend  less  time  in  their  own  home  or  Avith 
their  own  neighbors.  The  moving  picture  is  probal>ly  also  a  factor  in  the  situation, 
but  whatever  may  be  the  cause,  tlie  facts  seem  pretty  clear  that  the  demand  for  trans- 
portation service  is  still  growing  apace.  This  fact,  I  think,  i;'  generally  not  under- 
stood ;  in  fact,  I  am  free  to  confe^e  that  we  ourselves  were  surprised  to  see  the  extent 
of  tlie  increased  demand  for  service. 

In  1917  the  number  of  employees  was  294,826,  and  it  is  estimated 
that  the  total  number  of  people  who  were  directly  and  conveniently 
accessible  to  electric  railway  service  is  about  80,000,000  at  the  present 
time.  The  electric  railways  have  overllowed  municipal  boundaries 
and  now  include  a  network  of  interui'ban  lines  in  many  portions  of 
the  comitry,  bu*  the  fact  still  remains  that  the  iiulusUy  is  primarily 
a  street  railway,  with  its  principal  function  the  transportation  of 
passengers  within  the  limits  of  municipalities. 

vTliife  the  electric  railway  industry  is  essentially  local,  it  has  cer- 
tain national  characteristics.  Its  dilliculties  can  not  be  regarded 
simply  as  the  isolated  problem  of  a  local  system  repeated  hundreds 


PROCEEDINGS  OF  FEDERAL  ELECTRIC  RAILWAYS  COMMISSION.  7 

of  times  all  ovor  the  ooiintry  in  varied  forms  and  degrees,  each 
problem  being  in(l(^|)endent  of  all  the  others.  On  tlie  contrary, 
although  a  local  traction  svstem  may  be  separated  by  hundreds  of 
miles  from  its  nearest  neighbor,  it  is  in  other  ways  insej)arably  con- 
nected with  all  of  the  others.  As  a  purchaser"  in  the  equipment 
markets  of  other  vStates  it  competes  with  other  companies.  Its 
demands  for  labor  and  its  scales  of  wages  are  necessarily  felt  at  once 
by  traction  s)^stcms  cverpvhere.  In  procuring  its  ca])ital  its  ofhcers 
have  been  generally  compelled  to  market  its  securities  to  a  large 
extent  in  other  States,  among  investors  who  are  particularly  inter- 
ested in  such  classes  of  investment,  'fhc  close  industrial  and  finan- 
cial interdependence  of  the  hundreds  of  phvsically  unrelated  local 
traction  systems,  the  millions  of  dollars  of  capital  placed  by  thousands 
of  investors  in  plants  which  manufacture  electric  traction  equipment, 
and  the  five  biUions  of  electric  traction  bonds  and  stocks  to  be  found 
scattered  all  over  the  country  in  banks,  insurance  company  reserves, 
and  in  private  investment,  translate  the  many  local  problems  into 
a  national  problem. 

Section  III. 

FINANCIAL  CONDITION  OF  THE  ELECTRIC  RAILWAY  INDUSTRY. 

The  investigation  demonstrates  that  the  financial  condition  of  the 
electric  railway  industry  is  acute,  and  that  to  a  very  great  extent  it 
is  not  properly  performing  its  public  functions. 

The  record  in  this  case  shows  that  on  May  31,  1919,  there  were  62 
companies,  having  a  mileage  of  5,912,  in  receivership,  that  60  com- 
panies had  dismantled  and  junked  altogether  534  miles  of  railwav, 
and  that  38  companies  together  had  abandoned  257  miles  of  track. 
Since  that  date  and  up  to  f'Uly  1 ,  1920,  th^re  have  been  56  additional 
companies,  having  a  mileage  of  1,908,  which  have  been  thrown  into 
receivership. 

The  capitalization  of  the  industrv,  according  to  the  1917  census 
report,  is  represented  by  §3,058,377,167  in  bonds  and  S2, 473,846,651 
of  stock.  For  the  year  1917  the  net  income  of  operating  companies 
was  856,450,930,  representing  an  average  rate  of  return  of  2.81  per 
cent  upon  the  capital  stock.  In  1918  the  evidence  shows  the  net 
income  was  reduced  tx)  P20, 183,413,  which  represents  a  return  of  only 
1  per  cent.  As  a  whole,  there  has  been  some  improvement  in  the 
industry  since  the  commencement  of  these  hearings,  due  to  the 
fact  that  there  has  been  an  increase  in  the  car-riding  habit  since 
demobilization,  and  in  a  great  many  instances  the  fare  has  been 
increased  beyond  5  cents.  In  spite  of  this  slight  imjjrovement, 
however,  the  condition  of  the  industry  at  the  present  time  is  serious. 
A  great  many  companies  are  miable  properly  to  maintain  their  track 
and  equipment  and  to  perform  efficient  public  service,  to  secure 
funds  with  which  to  purchase  new  equipment,  to  build  necessary 
improvements  and  extensions,  or  to  refund  maturing  obligations. 

A  large  number  of  factore  have  contributed  to  the  present  plight 
of  the  electric  railway  industry.     Thes(^  may  be  mentioned: 

(a)  They  were  not  conservatively  financed  in  their  early  years, 
and  have  not  since  made  good  their  overcapitalization,  except  to  a 
limited  extent,  otherwise  than  through  the  process  of  bankruptcy 
and  reorganization.     In  the  early  days  the  promoters  of  electric- 

10972°— 20 2 


8  PROCEEDINGS  OF  FEDERAL  ELECTRIC  RAILWAYS  COMMISSION. 

railway  properties  believed  that  long-term  franchises  with  a  5-cent 
fare  would  be  permanently  profitable.  Large  sums  of  money  were 
required  to  develop  the-  business.  In  many  cases  the  promoters 
issued  bonus  stock  to  represent  their  hopes  and  expectations.  This 
bonus  stock  did  not  represent  money,  service,  or  propcrt}^  and  added 
nothing  to  the  value  of  the  plant.  As  a  result  of  tliis  practice,  there 
are  many  cases  where  the  existing  capitalization  exceeds  the  invest- 
ment in  the  plant  or  the  value  thereof. 

(b)  Neglect  to  amortize  tliis  excess  capitalization. 

(c)  Failure  to  amortize  the  normal  accrued  depreciation. 

(d)  Payment  of  unearned  dividends  and  neglect  of  ordinary  main- 
tenance. • 

(e)  Overbuilding  into  unprofitable  territory  or  to  promote  real- 
estate  enterprises,  involved  sometimes  -with  political  improprieties. 

if)  A  uniform  5-cent  fare,  which  established  a  constant  rate  to 
apply  during  variable  cost  periods.  This  contract  fare  has  been  a 
source  of  irritation,  resulting  in  litigation.  Diu-ing  normal  times 
many  communities  sought  to  have  the  fare  reduced  below  the  con- 
tract price.  The  companies  insisted  upon  adliering  to  the  contract, 
and  they  were  sustained  by  the  courts.  During  tlio  recent  high-cost 
period  many  companies  have  applied  for  an  increase  in  fare  to  enable 
them  to  meet  operating  expenses  and  fixed  charges.  In  many  cases 
communities  undertook  to  prevent  the  increase  beyond  the  contract 
rate.  Under  the  decisions  of  the  Supreme  Court  of  the  United  States 
and  of  the  highest  courts  of  a  number  of  States,  it  is  now  established 
that  a  francmse  provision  naming  a  certain  rate  of  fare  creates  no 
vested  riglit  of  any  car  rider  but  that  such  fare  can  be  properly 
changed  by  appropriate  legislation  and  substituted  by  a  higher 
charge. 

As  indicative  of  the  fact  that  the  5-cent  fare  has  not  been  adequate 
during  the  war  period,  we  need  only  to  call  attention  to  the  fact  that  on 
July  1,  1920,  increased  fares  have  been  allowed  in  over  .500  selected 
cities;  10-cent  fares  have  been  allowed  in  69;  9-cent  fares  in  two  cities; 
8-cent  in  30  cities ;  7-cent  with  1-cent  charge  for  transfers  in  26  cities ; 
7-cent  zones  in  6  cities;  7-cent  in  145  cities;  6-cent  zones,  with  2-cent 
transfer  charge,  in  10  cities;  6-cent  for  two  zones,  with  2-cent  per  zone 
thereafter,  in  13  cities;  6  cents  for  each  two  zones  in  4  cities;  6  cents 
cash  fare  in  some  cases  in  149  cities;  5-cent  zones  and  elimination 
of  reduced  rate  ticket  in  50  cities. 

Boston  has  a  10-cent  fare.  Chicago,  Washington,  Cincinnati, 
Kansas  City,  Youngstown,  and  other  large  cities  are  on  an  8-cent 
basis. 

It  would  seem  that  so  long  as  the  railways  depend  upon  earning 
power,  and  earning  power  depends  upon  passenger  revenue,  the  fixed 
unilorm  fare  is  a  broken  reed  for  the  industry  or  for  the  community 
to  lean  upon.  Perhaps  the  general  sentiment  of  the  electric  railways 
is  best  expressed  by  the  evidence  of  Gen.  Guy  Tripp  before  this  Com- 
mission, as  follows: 

We  were  all  living  in  a  fool's  paradise  in  the  street  railway  business  when  we  sud- 
denly woke  up— wlien  the  war  woke  us  up— to  find  that  no  ])usine33  which  can  not 
increase  its  revenues  under  any  conditions  can  live  or  is  sound. 

Conversely,  it  may  be  said  that  no  community  shoidd  bind  itself 
by  contract  or  otherwise  to  continue,  after  normal  conditions  have 
been  restored,  a  rate  which  might  be  found  reasonable  during  this 
abnormal  period. 


PROCEEDINGS  OF  FEDERAL  ELECTRIC  RAILWAYS  COMMISSION.  9 

iq)  Limited  franchises  which  impair  credit  and  toward  tlie  expi- 
ration of  the  franchise  residt  in  neglect  of  the  maintenance  of  the 
property. 

Oi)  Special  taxation  and  franchise  ohligations,  having  particular 
r(5ference  to  street  paving,  street  sprinkling,  construction  and  main- 
tenance of  hridges  used  by  the  general  public,  general  taxation,  etc. 

The  American  Electric  Railway  Association  introduced  a  chart 
which  showed  that  the  total  amount  of  taxes  levied  against  the 
properties  in  1917  amounted  to  S45, 756,695,  of  which  taxes  on  real 
and  personal  property  was  $21,804,619,  and  on  earnings,  capital, 
and  other  taxes  823,952,076,  representing  10.11  per  cent  ojf  the 
operating  expenses.  In  1902  the  ratio  of  taxes  to  operating  expenses 
was  9.19  per  cent.  It  is  thus  seen  that  there  is  only  a  small  increase 
in  the  ratio  of  expense  for  this  item  since  last  year. 

For  the  period  from  1913  to  1918  the  expenditures  for  all  taxes, 
including  paving  and  other  imposts,  has  ranged,  from  ■S60,000,000  to 
$65,000,000,  coiTcsponding  to  10  per  cent  of  the  operating  revenues. 
The  ratio  varies  very  materially  among  the  different  plants. 

The  evidence  on  behalf  of  the  companies  therefore  shows  that  on 
the  basis  of  the  5-cent  fare  the  taxes  represent  about  one-half  of  a 
cent  in  the  nickel  which  the  car  rider  nas  been  paying,  and  that 
they  thus  contribute  materially  to  the  necessity  for  fare  increases. 
The  argument  has  been  made  with  considerable  force  that  the  car 
rider  should  not  be  required  to  pay  for  supporting  the  city's  schools, 
its  almshouses  and  other  city  institutions.  It  is  contended  that 
the  company  should  be  required  to  pay  in  taxes  to  the  city  only 
such  an  amount  as  would  reimburse  the  city  for  its  actual  cost  due 
to  the  presence  of  the  street  railway;  and  that  such  a  plan  of  taxation 
alone  would  be  consistent  with  the  idea  that  the  car  fare  should  be 
based  upon  the  real  cost  of  rendering  the  actual  service  of  transporta- 
tion. 

Although  there  is  much  force  in  this  idea,  and  it  should  be  borne 
in  mind  V)y  all  who  are  interested  in  street  railway  problems,  we  do 
not  think  the  time  is  ripe  for  recommending  its  general  adoption. 
The  heavy  taxation  to  which  the  companies  are  now  subject  came 
into  being  during  the  period  of  their  prosperity  and  at  a  time  when 
they  were  still  essentially  private  concerns,  relatively  free  from 
regulation.  It  was  natural  that  their  properties  should  be  taxed  in 
no  less  degree  than  the  properties  of  other  private  corporations. 

AVlien  a  company  comes  to  subject  itself  to  such  a  comprehensive 
regulation  as  renders  its  property  in  effect  a  public  instrumentality, 
then  tax  exemption  begins  to  be  in  order.  This  couree  has  indeed 
been  followed  in  Cleveland,  where  as  an  incident  to  the  passing  of 
the  properties  under  the  Tayler  plan  of  municipal  reguhition  they 
came  to  be  exempted  in  large  measure  from  taxation.  To  the 
extent  that  it  may  become  possible  in  any  community  under  similar 
conditions  to  exempt  street  railway  property  from  taxation,  the 
rider's  car  fare  will  come  more  nearly  to  represent  the  actual  cost 
of  rendering  the  service  of  transportation — in  itself  a  desirable 
result.  But  it  would  seem  that  the  status  of  the  company  as  a 
public  agency  should  be  well  assured  before  such  exemption  sh9uld 
be  attempted. 


10         PROCEEDINGS  OF  FEDERAL  ELECTRIC  RAILWAYS  COMMISSIOIT. 

(i)  Automobile  and  jitney  competition. — For  several  yeai-s  prior  to 
the  war,  and  to  an  increasing  extent  throughout  the  war  period  and 
up  to  the  present  time,  the  automobile  has  proven  to  be  a  serious 
competitor  of  the  electric  railways  rendering  local  transportation 
service.  Jitneys  and  automobile  buses  operating  as  common 
carriers  have  been  able  in  some  cases,  through  the  absence  of  sufli- 
cient  public  regulation,  to  engage  in  unfair  and  destructive  competi- 
tion with  the  electric  railways  for  the  most  profitable  part  of  urban 
passenger  trafTic.  vStrong  as  this  competition  has  been,  however, 
the  electric  railway  industry  as  a  whole  has  shown  a  very  substantial 
increase  in  the  riding  habit.  The  operation  of  jitney  buses  as  com- 
mon carriers  is  much  more  restricted  than  the  operation  of  private 
automobiles,  but  the  jitneys  have  had  a  definite  and  intensive  effect 
upon  the  street  railway  situation  in  particular  communities,  for  the 
reason  that  they  have  engaged  in  direct  and  in  some  respects  destruc- 
tive competition  with  the  street  cars  as  public  carriers.  The  experi- 
ence of  numerous  communities,  even  before  the  extraordinary 
conditions  growing  out  of  the  war,  made  it  clear  that  unrestricted 
jitney  operation,  though  more  or  less  temporary  and  precarious  in 
character,  threatens  the  service,  credit  and  solvency  of  the  street 
railways. 

( j  )  Tlolding  companies  and  hanlier  control. — About  75  per  cent  of 
the  public  utilities  of  the  comitry  are  held,  m  whole  or  in  part,  by 
so-called  "holding  companies,"  which  are  responsible  for  their  oper- 
ation. Tills  fhiancing  is  done  m  large  part  through  the  securities  of 
the  parent  company,  which  securities  are  supported  by  the  securities 
of  the  various  operating  companies.  This  frequently  gives  an  ele- 
ment of  strength  to  the  securities  of  the  parent  company  which  a 
smgle  localized  operating  company  could  not  in  all  cases  present. 
If  it  were  not  for  the  supporting  strength  of  these  parent 'companies, 
many  of  the  individual  operathig  companies  would  have  gone  under 
before  January  1,  1918. 

Through  these  hoidhig  companies  the  electric  raihvays  threaten  to 
become  a  banker-controlled  industry.  Those  who  have  the  ultimate 
say  in  matters  of  street  railway  policy  from  the  point  of  view  of 
investors  have  been  dependent  for  their  profits  and  their  power  upon 
the  volume  of  secm-ities  outstanding  and  the  frequency  with  which 
these  securities  have  been  exchanged  or  refunded.  Holding  com- 
panies in  many  instances  have  been  responsible  for  overca])italiza- 
tion  and  have  insisted  upon  drawing  from  the  underlying  companies 
every  possible  cent  that  could  be  secured  in  order  to  nuike  a  showing 
on  these  inflated  securities.  ~Hon.  Joseph  B.  Eastman,  at  present  a 
member  of  the  Interstate  Commerce  Commission,  discussed  the 
question  as  follows: 

Jn  the  third  place  a  factor  of  weakness,  I  thinjc,  was  the  control  of  the  companies 
in  many  instances  by  holding  companies  organized  in  the  form  of  voluntary  associa- 
tions, or,  to  u^e  a  more  technical  term,  express  trusts.  Although  the  stock  and  bonds 
of  the  street  railway  companies  themselves  were  issued  under  pulilic  supervision, 
thede  voluntary  associations  whicli  corralled  all  tlieir  stock  were  subject  to  no  regula- 
tion whatever  and  issued  shares  upon  an  inllated  basis,  and  tliat  had  the  result  of 
accentuating  the  desire  to  draw  every  possible  drop  of  income  out  of  thd  underlying 
companies  that  could  be  secured,  in  order  to  support  earnings  upon  the  inflated  shares 
of  thtse  voluntary  associations. 

Through  this  sj'-stem  of  financing  and  management  the  utilities 
have  been  largely  controlled  b}^  persons  living   distant  from   the 


PROCEEDINGS  OF  FEDERAL  ELECTRIC  RAILWAYS  COMMISSION.  11 

commiiuity  alTcctod  l)y  a  particular  electric  railway,  whose  prime 
consideration  has  been  to  s'ecure  a  return  upon  the  pr()])erty.  This 
"absentee"  management  and  control  has  not  been  successful  in 
bringine;  about  the  i)r()per  spirit  of  cooperation  between  the  local 
managers,  employees,  and  the  public.  Since  the  electric  railway 
companies  come  into  immediate  daily  contact  with  hirge  numbers 
of  people,  it  is  of  the  utmost  importance  that  the  industry  should 
gain  and  hold  the  respect,  confidence,  and  good  will  of  its  patrons. 
If  the  local  public  should  invest  its  money  in  the  stock  and  bonds  of 
its  local  utilities  there  would  be  an  improvement  in  the  relations 
now  existing  between  the  corporation  and  the  public. 

(li)  Use  of  regulatory  power  to  compel  more  and  hctt/'r  service. — 
Through  the  exercise  of  this  power  the  companies  have  been  required 
in  many  instances  to  improve  their  standards  of  service  and  equip- 
ment; to  equip  cars  with  vestibules  for  the- protection  of  the  motor- 
men;  and  to  give  better  heating,  lighting,  and  ventilation  for  the 
comfort  and  convenience  of  the  passengers.  Tliey  have  also  been 
obliged  to  install  safety  devices  and  make  stops  at  frequent  intervals. 
The  exercise  of  the  regulatory  i)ower  of  States  and  municipalities  has 
undoubtedly  added  to  the  cost  of  the  service. 

(I)  Underlying  companies  and  leased  lines. — CoiLsolidalions  have 
been  brought  about  tlirough  the  unification  of  a  number  of  separate 
corporations  which  owned  and  maintained  lines  of  track  witliui  the 
same  city.  In  many  cases  consolidations  were  made  upon  the  con- 
dition that  these  companies  should  be  guaranteed  a  certain  rate  of 
return  or  fixed  sum,  which  represented  a  high  percentage  yield  upon 
the  investment.  The  returns  thus  secured  have  been  a  frequent 
source  of  irritation,  induced  by  a  feeling  that  these  underlying 
companies  are  being  paid  more  than  a  reasonable  return  upon  the 
value  of  their  property.  Your  Commission  believes  that  excessive 
payments  to  the  underlying  companies  by  the  operatmg  company 
have  greatly  diminished  the  net  operating  revenue,  and  that  there 
can  be  no  satisfactory  solution  of  the  street  railway  problem  in  such 
communities  until  the  system  has  been  valued  as  a  whole,  and  the 
accounts  so  kept  that  the  public  may  laiow  that  the  rate  of  fare 
paid  yields  no  more  than  fair  return  upon  the  value  of  such  property. 

{in)  Increasing  demands  of  labor. — The  wages  of  street-railway 
labor  prior  to  the  war  were  generally  insufficient  from  the  view]ioint 
of  a  living  wage,  and  the  increases  in  wages  that  have  taken  place 
since  the  beginning  of  the  war  period  have  not  on  the  average  been 
as  great  as  the  increase  in  the  cost  of  living. 

At  the  time  of  our  entry  into  the  war,  the  average  wages  of  motor- 
men  and  conductors  for  companies  of  100  miles  and  over  were  ap- 
proximately 31.5  cents  per  hour.  Since  the  war  there  has  been  a 
rapid  increase  in  the  wages  of  employees.  The  National  ^Var  Labor 
Board  by  its  awards  in  the  year  1916  established  the  normal  wages 
for  this  class  of  service  in  different  cities,  varying  from  38  to  48  cents 
per  hour,  increasing  wr.ges  23  i  per  cent.  The  awards  of  the  board 
mark  the  beginning  of  the  rapidly  increasing  wages  in  this  class  of 
employment.  An  exhibit  filed  by  the  Amalgamated  Association 
of  Street  and  Electric  Railway  Employees  of  America  shows  the 
wages  for  conductors  in  the  ])rincipal  cities  of  the  Ignited  States  and 
Canada  as  of  January  1,  1920.  For  convenience  the  exhibit  is 
published  as  an  exhibit  attached  to  this  report. 


12         PEOCEEDINGS  OF  FEDEPuAL  ELECTRIC  RAILWAYS  COMMISSION. 

Since  that  date,  new  contracts  have  been  agreed  to  which  sub- 
stantially increase  the  wages  in  a  numbet  of  cities. 

(n)  The  war  and  the  dollar. — The  conditions  which  hare  been  here 
enumerated  tended  to  break  down  the  credit  and  stability  of  the 
electric-railwa}^  industry.  The  increases  in  prices  of  labor  and 
materials  entering  into  the  construction,  maintenance,  and  operation 
of  electric  railways  during  the  war  period  have  corresponded  with 
the  increases  in  the  prices  of  general  commodities  and  in  the  wages 
of  labor  in  all  industries.  Operating  costs  became  so  high  that  in 
many  cases  the  revenues  were  not  sufficient  to  pa}'  even  the  current 
expenses  of  operation.  Material  and  etpiipment  prices  reached 
abnormal  heights.  The  increase  over  1915  in  railway  motors  and 
car  equipment  show  87  per  cent;  locomotives,  87  per  cent;  rotary 
converters,  75  per  cent;  transformers,  70  per  cent;  switchboarils, 
100  per  cent;  motor  generator  sets  95  per  cent;  turbines,  100  per 
cent;  pig  iron,  106  per  cent;  steel  plates,  141  per  cent;  copper,  58  per 
cent;  steel  castings,  220  per  cent;  coke,  35  per  cent;  coal,  approxi- 
mately, 100  per  cent;  asbestos  material  (which  is  largely  used),  560 
per  cent;  other  insulating  materials,  125  per  cent;  magnetic  sheet 
steel,  280  per  cent;  labor  from  85  per  cent  to  90  per  cent. 

(o)  Cost  of  new  raoney. — The  destruction  of  caT)ital  incident  to  the 
World  War  and  the  unpreceilented  demand  of  the  Government  and 
industries  for  money,  resulted  in  largely  increasing  the  interest  rate 
for  loans.  More  attractive  loans  are  now  absorbing  monej'  available 
for  investment,  leaving  the  electric  railways  v/here,  even  with  credit 
restored,  they  would  have  to  compete  in  the  money  market  with 
prosperous  and  unregulated  enterprises. 

These  factors,  and  more  particularly  the  increase  in  wages,  fuel, 
material,  and  supplies,  during  and  since  the  war  period,  have  brought 
the  electric  railway  industry  to  the  point  v*  here  in  many  instances  it 
may  be  forced  to  abandon  public  service,  and,  in  most  cases,  to  a 
point  where  it  v.ill  be  unable  to  sccm'e  new  ca])ital  to  enable  it  to 
refund  maturing  obligations,  secure  new  ec^uipment,  and  to  make 
necessary  extensions  and  improvements  unless  some  solution  of  the 
situation  can  be  found. 

Section  IV. 
EMERGENCY  RELIEF. 

The  evidence  in  this  case  shows  that  the  State  regulating  commis- 
sion and  in  a  large  number  of  cases  the  local  tribunals  have  recog- 
nized that  it  has  been  necessary  to  grant  emergency  relief  to  secure 
to  the  communitiies  the  service  of  the  electric  railways. 

With  commendable  initiative  and  ofttimcs  against  a  hostile  pub- 
lic sentiment,  the  regulating  officers  have  granted  temporary 
increases  in  the  fares  v.ithout  undertaking  to  determine  the  value 
of  the  plants  or  make  a  long  and  exhaustive  investigation.  Very 
little,  if  any,  criticism  was  made  to  us  against  State  regulating  com- 
missions for  their  treatment  of  these  utilities  during  the  war  period. 
The  most  serious  difficulties  were  met  with  in  communities  where 
the  charge  was  fixed  by  franchises,  and  the  State  authorities  wore 
without  jurisdiction  to  regulate  fares.  During  a  war  or  other  abnor- 
mal i)eriods  it  would  seem  to  be  the  duty  of  the  State  and  numicipal 


PROCEEDINGS  OF  FEDERAL  ELECTRIC  RAILWAYS  COMMISSION.         13 

offic(Ts.  to  deal  promptly  with  petitions  for  increased  fares  and  to 
afYord  such  relief  as  will  enable  the  street  railway  to  serve  the  public 
and  maintain  its  track  and  equipment  in  proper  operating  condition. 
The  public  always  ^^ays  for  a  run-down  plant,  either  throu<2;h  inferior 
service  or  higher  charp:es.  The  first  essential  is  service  to  the  public. 
Due  recognition  of  this  fact  will  secure  to  the  investor  a  safe  return 
upon  his  investment  and  to  the  public  uninterrupted  operation. 

Sectiox  V. 

CREDIT  AND  COOPERATION  ARE  THE  COORDINATE  NEEDS  OF  THE 

ELECTRIC  RAILWAY. 

It  is  clear  from  this  record  that  the  two  serious  needs  in  the  electric 
railway  situation  to-day  are  its  need  of  credit  and  its  need  of  coop- 
eration between  the  public  and  the  utility. 

Credit  v^ill  enable  the  electric  railways  to  rehabilitate  themselves, 
to  adjust  their  capital  accounts,  and  to  meet  the  prices  of  normal 
replacements  which  are  now  upon  higher  price  levels.  The  coopera- 
tion of  labor  v;ill  enable  them  to  render  continuous  and  popular 
service,  to  effect  operating  economies,  and  to  get  into  their  treasuries 
the  full  amount  of  revenue  collected  from  the  riding  public.  First- 
class  credit  and  the  full  cooperation  of  their  employees,  if  properly 
utilized  in  rendering  adeciuate  public  service,  would  give  the  electric 
railways  a  well-nigh  impregnable  position  in  their  relations  to  the 
public  and  tend  to  disarm  and  overcome  the  prevailing  antagonism 
against  them.  With  capital  and  labor  performing  their  respective 
parts  freely  and  well,  restrictive  regulation  would  be  unpopular,  and 
the  demand  for  the  substitution  of  public  ownership  and  operation 
for  private  management  would  shrink  into^  relative  insignificance. 
The  test  of  private  ownership  and  managenient  lies  in  the  solution 
of  these  two  problems  of  credit  and  cooperation.  These  problems 
must  be  solved,  and  if  no  solution  is  practicable  under  present  owner- 
ship and  control,  then  the  only  course  open  is  the  complete  transfor- 
mation of  the  electric  railway  industiy  into  a  governmental  business. 
Each  member  of  this  Commission  believes  that  credit  can  be  secured 
and  private  operation  maintained  under  public  supervision. 

Unless  the  confidence  of  the  investor  in  the  securities  of  the  com- 
panies furnishing  this  essential  public  service  be  restored  the  public 
itself  must  in  some  way  assume  the  burden  of  supplying  the  funds 
necessary  for  their  continuance.  To  a  degree  unknown  to  private 
business  enter]>rises,  which  to  a  certain  extent  are  able  to  finance 
capital  expenditures  from  earnings,  the  electric  railways  are  depend- 
ent upon  new  investment — new  capital — for  the  extension,  improve- 
ment, and  betterment  of  the  service  which  they  perform.  Commu- 
nities need  and  are  constantly  demanding  additional  local  trans])or- 
tation  facilities.  They  require  large  sums  of  money,  which  can  only 
come  from  those  with  savings  to  invest.  Wlien  the  flow  of  new 
capital  ceases,  when  the  confidence  of  the  investor  in  the  ability  of 
the  enterprise  to  safeguard  the  integrity  of  the  investment  and  to 
insure  a  fair  return  thereon  ceases,  new  capital  is  unobtainable  and 
the  utility  can  no  longer  serve  the  purpose  for  which  it  was  created. 

This  condition  is  now  present.  Lack  of  confidence  in  electric 
railway  investment  exists  to-day  to  a  degree  which  has  caused  a 


14  PROCEEDINGS  OF  EEDERAL.  ELECTEIC  RAILWAYS  COMMISSION. 

partial  paralysis,  is  worldng  havoc  with  the  finances  of  the  companies, 
and  is  depriving  the  public  of  the  service  to  an  alarming  extent. 

For  rehabihtation  and  improvements  and  extensions  which  are 
vitally  needed  to  meet  the  requirements  of  every  gro-sring  commu- 
nity new  capital  at  once  and  in  large  amounts  is  imperatively 
required,  and  until  the  force  of  circumstances  convinces  those  with 
ca])ital  at  their  disposal  that  investment  in  electric  railway  securi- 
ties affords  safety  and  a  fair  return  it  can  not  be  obtained. 

So  far  as  the  requirements  in  norm.al  times  are  concerned,  certain 
characteristics  of  the  electric  railways  and  certain  conditions  under 
which  they  operate  tend  to  make  their  credit  almost  unlimited.  In 
the  first  place,  they  have  enjoyed  a  monopoly  of  the  most  convenient 
form  of  local  transportation  dm-ing  a  period  of  rapid  industrial 
development  and  of  rapid  increase  in  urban  population.  They  have 
a  continuous  and  imanediate  market  for  their  "goods."  They  seU 
transportation  as  it  is  produced.  Wliile  electric  railway  traffic 
fluctuates  somevrhat  from  year  to  year,  according  to  the  number  of 
passengers  and  the  prosperity  that  preA^afe,  and  fluctuates  somewhat 
from  season  to  season,  from  week  to  week,  and  from  day  to  day,  these 
fluctuations  are  relatively  unimportant.  The  business  of  trans- 
portation goes  on  every  day  in  the  year.  Under  normal  conditions 
the  credit  of  the  electric-railway  business  is  its  relative!}^  small  need 
for  ''fluid"  or  worldng  capital.  In  this  respect  it  occupies  a  position 
more  independent  than  that  of  any  other  utijity  or  any  other  private 
industry.  It  does  a  cash  business.  Almost  100  per  cent  of  its  reve- 
nues are  collected  in  advance,  through  the  sale  of  tickets  or  at  tlie  time 
the  service  is  rendered,  from  the  collection  of  fares  in  the  cars.  Money 
flows  into  its  coiTci's  day  by  day  in  a  relatively  even  stream.  Before 
it  pays  the  vrages  of  its  employees,  the  salaries  of  its  officere,  the 
claims  resulting  from  injuries  and  damages,  the  rentals  for  the  use 
of  property,  the  interest  and  dividends  on  its  investment,  or  its  taxes, 
it  has  already  collected  from  its  patrons  in  cash  full  compensation  for 
the  service  rendered.     It  does  not  send  out  hUls. 

The  increase  in  revenues  of  the  electric  raihvays  is  a  product  of 
three  lines  of  expansion.  These  arc  the  increase  in  luban  population, 
the  increase  in  the  riding  habit,  and  the  increase  in  tlie  rate  of  fare. 
The  gross  operating  revenues  of  the  electric  i-ailways  grew  from 
S247,000,000  in  1902  into  $630,000,000  in  1917— an  increase  of  163 
per  cent.  For  a  number  of  yeai-s,  particularly  during  the  first  decade 
of  the  century,  there  was  a  strong  tendency  toward  fare  reductions 
in  many  urban  communities,  but  the  evidence  shows  that  for  the  coun- 
try at  large  the  total  amount  of  electric  raihvay  operating  revenues 
increased  by  a  much  greater  per  cent  than  the  number  of  revenue 
passengers  during  the  15  yeare  ended  with  1917.  Since  the  latter 
date  there  has  been  a  strong  upward  tendency  in  street  railway  fares. 
Statistics  covering  75  per  cent  of  the  electric  railway  trafiic  of  the 
country  indicate  an  increase  of  nearly  14  per  cent  in  the  average  fare 
paid  from  1917  to  1919,  and  an  increase  of  about  22  per  cent  in 
passenger  earnings  during  this  two-year  period. 

Without  a  doul)t  the  enjo>anent  hy  the  clecti-ic-railway  industry 
of  a  steady  inflow  of  revenue  of  rapidly  increasing];  volume,  assured  hy 
the  most  fundamental  conditions  of  modern  life  and  the  strongly 
developed  habits  of  the  people,  is  extremely  faAorable  to  credit.  In 
what  other  industry  could  investment  be  made  with  greater  assm-ance 


PROCEEDINGS  OF  FEDERAL  ELECTRIC  RAILWAYS  COMMISSION.         15 

of  security  and  continued  earning  power?  Tlio  tracks  for  tlic  most 
part  are  in  the  public  streets  where  everyhody  can  sec^  them.  Tlio 
operation  of  the  cars  is  most  conspicuous.  It  would  b(^  hai-d  to  find 
another  industry  where  the  investment  is  completely  visible  to  all 
and  so  freely  observed  by  the  entire  population.  If  publicity  of 
operation  is  a  guaranty  agamst  the  waste  and  disappearance  of  capital, 
then  the  position  of  the  electric  railway,  where  everybody  can  observe 
it  every  day,  is  surely  conducive  to  the  development  and  retention 
of  credit.  From  this  viewpoint  how  differoit  is  a  street-railway 
investment  from  an  investment  in  mining  stock  or  in  tiie  fruit  lands 
of  the  far  West,  or  even  in  manufacturing  enterprises  in  one's  homo 
city?  The  capital  stock  of  electric  railways  does  not  require  to  bo 
refunded,  and  mider  sound  financial  and  regulating  policies  the  pro- 
portion of  stocks  to  bonds  outstanding  woiud  undoubtedl}'  be  niuch 
greater  than  is  shown  to  have  been  the  case.  Under  such  conditions 
refunding  difficulties  would  be  about  negligible. 

The  record  is  not  clear  as  to  the  amount  of  new  money  which  may 
be  required  year  by  year,  but  a  vcrv  conservative  estimate  places  the 
figures  at  between  $175,000,000  and  $200,000,000  per  annum,  to  be 
used  in  replacements,  rcfundiiig  obligations,  extensions,  and  improve- 
ments. 

For  the  purpose  of  restoring  credit,  it  seems  to  be  the  general 
impression  of  all  witnesses  that  the  first  necessity  is  for  the  industry 
to  put  into  effect  such  economies  of  operation  as  will  enable  it  to 
give  good  service  at  the  lowest  cost.  Generally  speaking,  tliis  can 
be  done  by  the  elimination  of  deadheads  and  other  free  service,  the 
abandonnrient  of  nonprofitable  lines,  and,  where  practicable,  the 
substitution  of  one-man  cars  for  heavier  equipment,  the  modification 
of  special  taxes  or  provisions  for  paving,  snow  removal,  street  closing, 
tolls,  contributions  toward  the  cost  of  public  highw^ays,  bridges,  etc., 
reduction  of  such  rentals  and  power  rates  as  may  on  investigation 
prove  excessive,  the  cooperation  with  the  public  in  develo]ung  faster 
schedules  and  installing  skip  stops  at  convenient  places,  rerouting  of 
cars,  the  use  of  trailer  cars,  keeping  street  car  tracks  clear  of  traffic 
and  other  congestion,  due  to  parking  of  motor  cars  on  curbs,  and  the 
regulation  of  vehicular  traflic.  Much  can  also  be  done  toward 
reduction  in  the  cost  of  operation  by  developing  the  proper  spirit  of 
cooperation  with  emplo3-ees.  All  of  the  matters  herein  suggested 
properly  come  under  the  head  of  good  management  and  regulation 
and  in  some  cases  w^ould  entail  legislation,  but  in  our  judgment  they 
do  not  wholly  solve  the  street  car  problem,  or  invite  needed  capital 
into  the  i?ulus(.iy.  During  the  past  two  years  efl'orts  have  been  made 
to  meet  the  difliculty  by  increasing  fares.  In  many  cases  this  has 
helped  to  tide  them  over  a  difficult  period,  but  it  has  not  stimulated 
the  confidence  of  the  investor  in  the  integrity  of  the  industry.  New 
capital  is  not  flowing- in  that  direction. 

An  effort  has  also  been  made  in  a  number  of  communities  to 
increase  the  short-haul  riding  habit  as  well  as  the  revenues  by  the 
introduction  of  the  zone  system  for  fares.  This  system  has  proven 
generally  successful  in  some  of  the  European  countries,  but  it  has 
met  with  varying  success  in  the  United  States.  Fundamentally  the 
theory  of  the  zone  system  is  logical.  It  is  that  a  passenger  pays  for 
what  he  gets.  Under  the  present  flat  fare  charge,  the  short-haul 
rider  is  paying  for  a  service  given  to  the  long-haul  rider. 


16  PROCEEDINGS  OF  FEDEEAL  ELECTRIC  RAILWAYS  COMMISSION. 

The  original  failure  of  the  electric  railways  to  vary  their  rates  of 
fare  for  transportation  service,  based  upon  the  length  of  the  ride,  as 
services  in  all  other  lines  of  business  are  sold,  is,  in  our  judgment,  one 
of  the  contributing  factors  to  their  present  financial  condition.  The 
electric-railway  industry  is  the  only  public  utility  which,  as  an 
industry,  has  consistently  adhered  to  a  flat  basis.  Steam  and 
suburban  roads  charge  on  a  distance  basis.  Gas,  power,  electric,  and 
water  power  companies,  generally,  make  their  rates  upon  a  measured 
basis,  subject  to  a  minimum  charge  per  month  and  the  telephone 
company  grade  all  toll  messages  on  a  mileage  basis,  while  observing 
in  most  cases  a  flat  rate  per  month  for  local  service.  Whether  or  not 
under  present  conditions  it  would  be  to  the  interest  of  a  community 
to  introduce  a  zone  system  of  fares,  instead  of  the  present  flat  fare 
sj^stem,  is  a  c[uestion  which  we  think  should  be  decided  by  the  com- 
munity itself,  having  reference  to  the  social  problems  involved. 

Section  VI. 

LABOR  ON  STREET  RAILWAYS. 

The  labor  policies  of  the  electric  street  railways  will  in  the  future 
be  of  great  importance  as  an  element  in  the  restoration  and  the 
perm.anent  maintenance  of  their  credit.  The  full  cooperation  of 
labor  is  essential  to  the  liighest  prosperity  and  usefulness  of  the 
industry.  Tliis  is  particularly  true  because  in  the  case  of  the  street 
railways  the  employees  who  immediately  handle  the  service  come 
into  direct  contact  with  the  i)eople  who  consume  that  service. 

The  evidence  before  this  Commission  shows  that  in  the  past  the 
suspension  of  service,  due  either  to  strikes  or  lockouts,  has  been 
costly  to  both  the  employees  and  to  the  operating  company,  but  the 
loss  occasioned  to  those  two  groups  has  been  secondary  to  the  damage 
wrought  to  the  public  interest.  The  conditions  which  recurrently 
bring  about  such  interruptions  of  service  should  be  treated  at  their 
roots.  The  employees  engaged  in-  this  occupation  should  have  a 
living  wage  and  humane  hours  of  labor  and  working  conditions. 
They  should  have  the  right  to  deal  collectively  with  their  employers 
through  committees  or  representatives  of  their  own  selection.  In  all 
contracts  and  working  agreements  made  betv/een  them  and  the 
employing  companies  there  should  be  arbitration  {)rovisions  under 
which  all  labor  disputes  which  can  not  be  voluntarily  settled  shall 
be  submitted  to  ]:)oards  of  arbitration  composed  of  disinterested 
persons.  The  award  of  such  a  board  of  arbitration  should  be  final 
and  binding  upon  both  parties  to  the  controversy;  for  it  is  intolerable 
that  the  ti'ansportation  service  of  a  city  should  bo  subject  to  occa- 
sional paralysis,  whether  by  strikes  or  by  lockouts.  It  would  seem 
that  public  authorities  could  well  interest  themselves  in  the  formula- 
tion of  such  plans  and  rules  for  the  arbitration  of  labor  disputes 
under  these  contracts  as  will  secure  justice  to  both  parties  and  as 
will  assure  continuitj^  of  service  in  so  far  as  that  may  be  possible  of 
achievement. 

But  the  full  cooperation  of  labor  in  the  street-railway  industry  will 
not  have  been  brought  about  alone  by  the  recogniti(m  of  the  right  of 
collective  bargaining  which  we  have  just  b(H'n  urging.  Such  recog- 
nition is  but  a  foundation  for  full  cooperation.  The  actual  work  of 
insuring  it  must  come  from  the  employees  themselves  to  whom  the 


PROCEEDINGS  OF  FEDERAL,  ELECTRIC  RAILWAYS  COMMISSION.         17 

right  of  colloctivc  bargaining  is  thus  given.  For  that  riglit  carries 
with  it  a  duty.  It  woukl  seem  to  be  the  duty  of  tiie  organization 
which  bargains  for  the  in(hvidual  worker  to  interest  itself  actively 
and  unremittingly  in  his  delivering  to  the  company  his  Ix'st  strength 
and  intelligence. 

This  Commission  thinks  that  where  the  street-railway  worker  has 
the  right  of  collective  bargaining  the  public  litis  the  i-ight  to  exp(>ct 
that  the  organization  or  association  repres(Miting  him  will  not  only 
procure  his  wage,  but  will  also  continuously  stimulate  his  whole- 
hearted constructive  cooperation  with  the  company  and  his  effective 
service  to  the  public. 

Section  VII. 

VALUATION. 

It  is  the  law  that  utilities  are  entitled  to  a  fair  return  upon  the 
value  of  their  property  used  in  public  service  at  the  time  of  the 
inquiry.  Tiie  metnods  for  finding  fair  value  arc  in  dispute.  No 
permanent  solution  of  the  electric  railway  question  can  be  found  in 
the  absence  of  a  finding  of  value  for  rate-making  purposes.  This 
applies  to  commission  form  of  regulation,  cost-of-service  contracts, 
or  public  ownership  and  operation.  The  public  should  knov/  what 
it  is  paying  for,  and  this  question  can  not  be  settled  without  knowing 
what  the  property  is  worth. 

Although  some  evidence  was  introduced  before  this  Commission  on 
the  subject  of  valuation,  the  Commission  discouraged  the  intro- 
duction of  testim-ony  upon  this  c^uestion  mainly  because  such  testi- 
mony, no  matter  over  how  many  weeks  or  months  it  might  bo 
extended,  would  have  been  but  a  fragmentary  duplication  of  material 
already  available  in  the  official  records  of  the  Interstate  Commerce 
Commission.  Pursuant  to  an  amendment  of  the  Act  to  Regulate 
Commerce,  approved  March  1,  1913,  which  amendment  is  known  as 
the  Valuation  Act,  the  InterstateCommerceCommission  has  during  tl.o 
past  seven  years  been  engaged  in  valuing  the  steam  railroads,  tele- 
graph, and  long-distance  telephone  companies  in  the  United  States. 
In  connection  with  this  work  it  has  carried  on  a  most  extensive 
investigation  into  the  subject  of  valuation  for  rate-making  pur[)()ses, 
in  the  course  of  which  investigation  the  carriera  have  been  represented 
by  a  conference  committee  of  50,  assisted  by  able  lawyers,  account- 
ants, and  engineers,  while  the  public  has  been  represented  by  the 
State  public  utility  commissioners,  their  counsel,  and  l)y  the  General 
Counsel  of  the  Interstate  Commerce  Commission.  Every  theorv  and 
principle  of  valuation  has  been  fully  and  ably  discussed,  argued,  and 
briefed. 

On  July  31,  1918,  the  Interstate  Commerce  Commis^uon  submitted 
its  report  in  Valuation  Docket  No.  2,  Texas  Midland  Jiailway.  This 
report  contains  a  full  discussion  of  the  different  theories  of  valuation 
considered,  the  method  employed  bv  the  Commission  in  assembling 
all  the  essential  data,  and  discussion  of  the  requirements  of  the 
Valuation  Act,  and  the  findings  of  the  Commission  upon  most  of  the 
disputed  questions.  Subsec[uent  decisions  were  made  in  the  case  of 
the  Winston-Salem  Southbound,  Alabama,  Birmingham  &  Atlantic, 
and  Kansas  City  Southern  llailroads.  We  are  informed  that  deci- 
sions aft'ecting  many  of  the  other  railroads  "will  be  made  during  the 
present  year. 


18  TEOCEEDINGS  OF  FEDEllAL  ELECTEIC  RAILWAYS  COMMISSION. 

The  first  requirement  of  the  Vahiation  Act  is  for  finding  of  original 
cost.  The  Commission  is  reporting  original  cost  as  fully  as  it  possibly 
can  be  obtained  from  the  best  availa1:>le  evidence  in  each  particular 
case.  In  its  vahiation  proceedings  it  has  been  earnestly  contended 
that  the  cost  of  reproduction  new  as  of  the  date  of  inquir}'  should 
be  taken  to  be  the  value  of  tlic  property.  Others  have  contended 
with  equal  earnestness  that  the  value  of  the  property  should  be 
limited  to  the  original  cost,  as  this  item  represents  the  money  which 
has  been  actually  invested  by  the  stockholders  and  bondholders  in 
the  property.  The  rapid  increase  in  the  cost  of  labor,  supplies,  and 
material  during  and  subsec[uent  to  the  war  period  seems  to  have 
served  as  a  peculiarly  vivid  indication  that  the  original  cost  is  a 
primary  factor  in  finding  value  for  rate-making  purposes. 

In  our  opinion,  the  decisions  of  the  Interstate  Commerce  Commis- 
sion, based  upon  long  experience  and  investigation,  will  in  large 
measure  settle  the  standards  of  valuation.  For  this  reason  we  suggest 
that  municipalities  and  States  which  may  be  engaged,  by  arbitration 
or  otherwise,  in  fixing  the  values  of  electric  railways,  should  familiar- 
ize themselves  with  the  practice,  experience,  and  decisions  of  the 
Interstate  Commerce  Commission  in  these  valuation  cases. 

The  valuation,  when  once  fixed  as  the  basis  for  the  financial  return 
of  the  company,  should  logically  come  to  affect  the  amount  of  capitali- 
zation. No  matter  what  may  be  the  plan  of  operation  or  of  public 
regulation  under  which  the  company  is  working,  if  its  financial  credit 
is  to  be  strengthened  through  just  and  stable  arrangements  with  a 
friendly  public,  it  should,  in  the  judgment  of  this  Commission, 
voluntarily  reduce  any  excessive  capitalization  to  conform  to  such 
valuation  as  may  have  been  determined  upon. 

Section  VIII. 
PRESERVATION  OF  RECORDS. 

We  would  particularly  urge  public  officials  and  officers  of  the 
electric  railways  to  cooperate  seriously  in  the  protection  and  preser- 
vation of  all  corporate,  financial,  and  cost  records. 

Service-at-cost  plans  have  been  recentl}^  rejected  by  popular  vote, 
largely  on  the  issue  of  valuation,  in  Chicago,  Denver,  and  Minne- 
apolis. The  public,  justly  or  unjustly,  has  become  so  suspicious 
of  the  electric-railway  companies  that  it  may  be  expected  to  reject 
any  service-at-cost  or  public  ownership  question  submitted  to  pop- 
ular vote,  no  matter  how  fairly  the  plan  may  be  formulated,  if  it 
is  not  thoroughly  convinced  that  the  capital  item  has  been  fairly 
and  honestly  arrived  at.  The  failure  of  a  company  to  preserve  its 
record  may  in  the  end  hurt  its  stockholders  more  than  it  may  the 


pul)lic. 


Section  IX. 
AUT0!\[0B1LE,  JITNEY,  AND  MOTOR  BUS. 


The  automobile  and  jitney  bus  are  facts.  Jitney  competition 
began  about  1912,  and  was  at  first  entirely  unregulated.  Even  to- 
day in  some  places  it  continues  without  regulation  of  any  kind,  and 
in  many  places  with  only  partial  and  inefficient  regulation.  In 
no  instance,  so  far  as  tliis  record  shows,  has  this  so-called  jitney 
carriage  of  passengers  been  subjected  to  obligations  as  to  the  payment 


PROCEEDINGS  OF  FEDERAL  ELECTRIC  RAILWAYS  COMMISSION".         19 

of  taxes,  maintenance  of  highways,  character  and  extent  of  service, 
and  financial  rcsponsi])ility  for  accidents  under  which  tlie  electric 
railway  ])nsiness  is  being  conducted.  The  portion  of  the  street  paved 
and  maintained  t)y  the  electric  raihvay,  and  in  winter  cleared  oi  snow 
ax  its  own  expense,  is  tak(ni  advanlttge  of  l)y  the  jitney  competitor 
without  compensation  either  to  the  company  or  to  the  munici- 
pality, and  often  to  the  sci'ious  injury  of  the  street  railway  by  inter- 
lering  with  the  prompt  and  regular  movements  of  its  cars.  Tho 
jitneys  prefer  to  confine  themselves  almost  exclusively  to  the  short- 
haul  trafhc.  It  appears  that  in  tlie  city  of  Bridgeport  the  jitneys 
carry  about  50  per  cent  of  the  passengers  riding  within  1\  miles  of 
the  center  of  the  city;  almost  69  per  cent  of  the  passengers  riding 
between  1^  and  2  miles  from  the  center;  a  fraction  less  than  45  per 
cent  of  tho.se  riding  between  2  and  2if  miles  from  the  center;  and 
none  riding  more  than  2J  miles  from  the  center  of  the  city. 

Tiie  ffaestion  from  the  point  of  view  of  the  street-railway  service 
is,  What,  if  anything,  is  to  be  done  about  them  ?  The  public,  through 
its  governmental  agencies,  would  not  concern  itself  witli  the  effects 
of  tliis  c()m])etition  if  it  were  not  that  local  trans])ortation  is  recog- 
nized to  be  an  essential  public  service.  So  far  as  private  automobiles 
are  concerned,  although  they  undoubtedly  have  tlieir  effect  upon  the 
extent  to  which  people  make  use  of  the  street  cars,  they  are  even 
now  less  important  tlian  human  legs  as  competitors  of  the  electric 
railways,  and  it  is  not  deemed  to  be  consonant  with  the  theory  of 
American  institutions  and  government  that  the  free  movement  of 
private  citizens  by  their  own  means  of  locomotion  shoidd  be  re- 
stricted in  order  to  compel  them  to  make  use  of  public  vehicles, 
whether  the  latter  be  oi)orated  by  private  agencies  or  directly  by 
the  Government.  All  that  could  be  properly  done  in  this  direction 
would  be  to  compel  the  private  vehicle  using  the  public  highways 
to  pay  license  fees  or  taxes  proportionate  to  the  burdens  they  place 
upon  the  highways,  as  compared  with  the  burden  placed  upon  the 
highways  by  the  street  cars. 

While  there  is  some  diversity  of  opinion  as  to  the  permanency  of 
the  electric  railway  industry,  in  view  of  the  improvements  which  are 
being  made  in  the  use  of  gasoline  and  electric  power  machines,  the 
opinion  appears  to  be  nearly  unanimous  that  the  electric  railway 
operating  on  tracks  is  the  most  efhcient  means  of  furnishing  local  trans- 
portation service  in  the  urban  centers.  The  future  of  the  gasoline 
public  conveyance  in  urban  transportation  is  entirely  unreckonable. 
Great  strides  have  been  made  and  greater  strides  will  doubtless  yet 
be  made  in  its  use.  Local  public  authority  would  indeed  be  exer- 
cismg  a  dangerous  power  in  unduly  restricting  the  use  of  new  inven- 
tions for  public  transportation  at  a  time  when  in  nearl}'  every  large 
city  the  physical  task,  even  for  an  electric  railway  well  equipped,  of 
carrying  the  public  in  decent  comfort  is  becoming  so  formidable. 
If  jitneys  and  automobile  buses  acting  as  common  carriei-s  were 
su])ject  to  regulation  by  State  commissions  and  were  recpiired  to 
procure  a  certificate  of  public  convenience  and  necessity  before 
establishing  a  route  or  undertaking  to  render  public  service,  the 
motor  vehicles  would  be  prevented  from  entering  into  active  com- 
petition with  street  car  service  unless  the  latter  is  shown  to  be  wholly 
inadequate. 

•  That  street-railway  service  and  jitney  service  can  not  permanently 
exist  and  pay  their  own  way  in  competition  with  each  other  under 


20         PROCEEDINGS  OF  EEDEEAL  ELECTEIC  RAILWAYS  COMMISSIOIT. 

any  ordinary  urban  conditions  seems  to  be  well  established  by 
experience  and  by  the  conditions  inherent  in  local  transportation 
seryice,  but  the  belief  is  general  that  the  motor  bus"  may  properly 
be  used  to  supplement  the  seryice  rendered  b}^  the  street  care.  The 
motor  bus  may  be  used  to  render  a  sort  of  supplementary  seryice, 
such  as  the  seryice  now  rendered  on  Fifth  Ayenue  and  certain  other 
liigh-gradc  residential  streets  in  New  York  City  by  the  Fifth  Ayenue 
Coach  Co.,  or  the  buses  may  be  operated  on  other  independent  routes 
mereh'  as  feeders  to  the  street  railway  system  to  take  care  of  traffic 
in  partially  deyeloped  territory  in  adyance  of  the  time  when  street 
railway  tracks  can  be  laid  with  reasonable  assurance  that  the  inyest- 
ment  will  bo  self-sustaining. 

Undoubtedly,  the  whole  matter  of  the  control  or  abolishment  of 
jitney  competition  may  be  summed  up  in  a  few  words.  All  trans- 
portation seryice  is  for  the  public.  Jitneys  and  automobile  buses 
can  not  be  repressed  merely  for  the  sake  of  compelling  people  to 
ride  on  the  street  cars,  particularly  if  the  car  fares  are  higher  than  the 
jitney  fares  and  the  car  seryice  less  conyenient  than  the  jitney  serv- 
ice. Howeyer,  it  is  clearly  in  the  public  interest  that  all  common 
carriers  engaged  in  local  transportation  seryice  should  be  required 
to  render  adequate  and  safe  service,  and  that  local  transportation 
facilities  should  bo  deyeloped  in  the  most  economical  and  off<>ctiye 
way  from  the  point  of  view  of  the  community.  Unnecessary  and 
destructiye  competition  ought  not  to  be  permitted,  and  the  com- 
munity at  large  should  conserve  the  established  facility  that  still 
is  and  promises  to  continue  for  an  indefinite  period  the  principal 
means  of  local  transportation.  The  problem  in  a  considerable 
measure  is  a  local  one,  but  in  every  case  it  should  be  solved  with 
intelligent  regard  to  the  permanent  interests  and  obligations  of  the 
community.  If  the  street  railways  are  to  be  allowed  the  benefits  of 
even  a  qualified  monopoly,  tliey  should  be  required  to  fulfill  their 
obligations.  They  must  render  sorvico  that  is  adequate  and  con- 
venient at  rates  that  are  attractive.  The  community  can  aiford 
•to  go  a  long,  way  to  preserve  street-railway  service,  and  the  effixient 
regulation  of  jitney  and  motor  bus  competition  will  aid  considerably 
in  restoring  the  confidence  of  investors  in  the  future  of  the  electric- 
railway  industry  and  in  increasing  their  gross  and  net  revenues. 

Section  X. 

DEPRECIATION. 

The  electric  railways  should  adopt  the  policy  of  setting  aside  a 
depreciation  fund  with  which  to  take  care  of  replacements  and  thus 
preserve  the  integrity  of  their  investment.  It  would  have  a  very 
wholesome  effect  upon  credit.  Such  has  .not  been  the  practice  in 
the  past.  Deferred  maintenance  has  accumulated  to  an  alarming 
extent  during  the  war  period. 

Generally  speaking,  regulating  commissions  have  the  power  to 
prescribe  metiiods  of  accounting  and  to  establish  the  amount  of  the 
depreciation  fund.  This  pi'actice  should  be  observed,  and  its  adop- 
tion will  improve  the  situation  of  the  industry  and  be  greatly  in  the 
interest  of  the  public  welfare. 


PROCEEDINGS  OF  FEDERAL,  ELECTRIC  RAILWAYS  COMMISSION.         21 

Section  XI. 

EXTENSIONS  SHOULD  BE  PAID  FOR  BY  ASSESSMENTS  ON  OUTLYING 
PROPERTY  BENEFITED. 

Your  Commission  would  iirr^e  that  in  cvcrv  community,  wliore  and 
to  such  extent  as  may  be  practicable,  consideration  be  ^ivcn  to  the 
advisability  of  requirinoj  extensions  and  rapid  transit  systems  of 
subway  and  elevated  to  be  paid  for,  not  out  of  new  capital  invested 
through  the  medium  of  bonds  or  stock,  which  moans  for  all  time  an 
added  burden  upon  the  car  rider,  but  from  special  taxes  assessed 
against  the  owners  of  property  in  the  district  the  value  of  which 
is  enhanced  by  such  extensions. 

This  would  not  be  a  new  principle;  it  would  be  merely  the  applica- 
tion of  an  old  principle.  The  American  property  owner  has  been 
accustomed  to  contributing  out  of  the  increase  in  value  of  his  property 
to  the  cost  of  building  streets  and  other  public  improvements.  The 
principle  is  peculiarly  applicable  to  improvements  of  city  transporta- 
tion systems,  because  of  the  enormous  increases  in  real  estate  values 
created  when  now  extensions  open  up  new  territory  or  when  the 
creation  of  rapid-transit  facihties  make  outlying  territory  more  avail- 
able. 

The  City  Club  of  New  York,  in  1908,  a  few  years  after  the  extension 
of  the  New  York  subway  from  One  hundred  and  thirty-fifth  to  Two 
hundred  and  thirtieth  Streets,  in  Manhattan,  had  been  built  at  a  cost 
of  §7,375,000,  made  an  authoritative  study  of  new  real  estate  values 
created  by  that  extension  in  the  district  lying  between  One  hundred 
and  tliirty-fifth  and  Two  hundred  and  thirtieth  Streets.  After 
deducting  §20,000,000  as  a  liberal  estimate,  based  upon  studies  of 
parallel  situations,  of  the  natural  increase  in  property  values  in  that 
district  wiiich  would  have  taken  place  without  the  subv.'ay  extension, 
it  was  found  that  the  increase  in  values  clearly  brought  about  by  the 
subway  extensions  was  $49,200,000,  an  amount  upward  of  seven 
times  the  cost  of  the  improvements.  The  property  in  the  district 
enjoyed  an  increase  in  value  of  104  per  cent.  If,  by  assessment,  it 
bad  borne  the  entire  cost  of  the  extension  in  the  district,  it  would 
have  still  retained  a  new  profit  on  the  value  of  the  land  of  89  per  cent, 
or  an  aggregate  of  S41,825,000  for  the  district.  The  Manhattan 
extension  just  referred  to,  together  with  The  Bronx  extension  beyond 
One  hundred  and  thirty-fifth  Street,  cost  $13,075,000.  These"  two 
extensions  directly  created,  in  a  lunited  area  lying  near  those  exten- 
sions, new  land  values  solely  due  to  the  extensions  of  $80,500,000. 
Let  it  be  borne  in  mind  that  the  cost  of  the  entire  subway  system  from 
the  Battery  to  Two  hundred  and  thirtieth  Street  in  Manhattan  and 
to  Bronx  Park  was  about  $43,000,000. 

In  Philadelphia  recent  estimates  of  improvements  in  land  values 
expected  from  rapid-transit  projects  in  contemplation  have  been 
equally  enlightening.  Similar  results  would  be  certainly  obtained 
in  many  otlier  cities  by  studies  similar  to  that  made  by  the  City 
Club  of  New  York. 

Is  it  not  in  accordance  with  the  laws  of  economic  justice,  then, 
that  the  landowner,  as  such,  should  share  his  benefit  of  increased 
land  value  with  the  public?  Instead  of  the  cost,  $7,375,000,  of  the 
Manhattan  extension  being  borne  by  the  owners  of  the  land  in  the 
newly  served  territory,  it  was  capitalized  and  translated  into  an  an- 
nual charge  of  $350,000  or  more,  a  burden  which  had  to  be  borne  out 


22  PROCEEDINGS  OF  FEDERAL  ELECTRIC  RAILWAYS  COMMISSION. 

of  the  car  fares  and  which  to-day  hcl])s  to  intcTisify  tlio  financial 
predicament  in  which  the  company  finds  itself.  If  the  pubhc  pays 
out  of  its  fares  for  the  cost  of  maintaining  and  operating  the  line  which 
will  bring  the  outlying  landowners  such  enrichment,  should  the  latter 
not  share  with  the  pubhc  out  of  that  enrichment,  depending  upon 
the  degree  in  which  he  is  benefited,  by  paying  for  or  t3y  helping  to 
pay  for  the  initial  cost  of  construction  of  the  line?  That  such  a  solu- 
tion is  just  is  rather  significantly  shown  l>y  the  fact  that  in  a  number 
of  cities  landowners  in  outlying  districts  have  offered  spontaneously 
to  contri])ute  large  sums  to  the  company  to  assist  it  in  constructing 
certain  extensions.  The  present  predicament  of  the  street-railway 
companies  is  in  many  places  partly  duo  to  overbuilding,  a  fault 
traceable  to  political  or  business  pressures  exerted  by  speculators  in 
suburban  lands  who  had  little  -or  no  financial  responsibihty  in  con- 
nection \\dth  the  street-railway  extensions  which  they  caused  to  be 
built  for  their  immediate  benefit.  This  action  of  the  suburban  land- 
OAvners  of  certain  cities,  on  the  other  hand,  is  a  significant  expression 
of  enlightened  self-interest  and  a  sound,  constructive  recognition  of  a 
fundamental  principle  of  justice.  The  establishment  of  that  principle 
by  law,  whether  by  changes  in  city  ordinances.  State  statutes,  or 
State  constitutions,  should,  in  our  opinion,  not  be  delayed.  This 
thought  is  especially  recommended  to  the  attention  of  a  number  of 
communities  which  are  now  facing  the  necessity  of  extensions  or 
rapid-transit  improvements. 

Three  points  in  this  connection  should  be  briefly  touched  upon: 

First.  The  amount  of  the  assessment  on  any  owner  would  proba- 
bly have  to  become  fixed  by  an  appraisal  sometime  after  the  con- 
struction of  the  improvement,  and  the  owner  should  be  given  the 
option  of  pa3nng  his  assessment  in  instalhnents  over  a  course  of  years. 
Consequently  the  actual  first  financing  of  the  extension  might  have 
to  be  by  the  city. 

•Second.  It  will  doubtless  be  urged  by  some  that  such  a  sj^stem  for 
building  extensions  would  lead  to  municipal  ownership.  (Jn  the  con- 
trary, it  seems  to  us  that  if  properly  administered  it  could,  by  reduc- 
ing the  acuteness  of  the  fare  question,  serve  with  much  force  to  offset 
the  pressm'e  for  municipal  ownership. 

Third.  As  to  the  problems  incident  to  allowing  a  private  company, 
for  a  nominal  rent  and  in  retm'n  for  undertakings  as  to  repair  and 
maintenance,  to  take  over  or  use  public  property,  similar  problems 
incident  to  similar  arrangements  have  already  been  ably  and  eflec- 
tively  handled  in  Boston  and  a  number  of  other  cities  under  State  or 
municipal  regulation  in  connection  with  subways  and  other  structures. 

If  objection  to  the  employment  of  such  principle  in  constructing 
extensions  be  made  upon  the  ground  that  public  officers  and  land- 
owners along  the  line  of  the  proposed  extension  are  thus  given  the 
pov/er  to  veto  such  extension,  let  it  be  remenibered  that  the  problem 
of  extensions  is  not  only  a  serious  financial  problem,  but  is  also  essen- 
tially and  finally  a  long-range  social  ])rol)lem.  The  development  of  a 
city's  street  railwa3^s  should  be  guided  primarily  not  by  the  fortuitous 
financial  expediencies  of  a  small  group  of  l)ankers  or  real  estate 
operator.  It  should  be  guided  by  the  loresight  and  vision  of  those 
who  are  officially  responsible  for  planning  the  city's  growth  and  life, 
in  terms  of  its  water  supply,  its  light,  its  streets,  its  sewers,  its  schools, 


PROCEEDINGS  OF  FEDERAL  ELECTRIC  RAILWAYS  COMMISSIOiT.         23 

its  parks,  its  playgrounds,  its  civic  centers,  its  night  amusements, 
its  community  life,  its  libraries,  its  hospitals.  It  should  be  gui(h'd 
by  those  whose  public  duty  it  is  to  be  interested  in  the  health  and 
happiness  of  the  average  city  toiler  and  his  family  of  growing 
childi-en. 

The  call  for  municipal  ownership  to-day  does  not  all  emanate  from 
dissatisfaction  with  the  service  in  a  nairow  sense  as  riding  faeihties. 
It  is  largely  an  expression  of  feeling  on  the  part  of  many  that  tho 
street  railway,  instead  of  helping  to  make  conditions  bearable,  is 
contributing  to  making  them  unbearable;  that  it  is  not,  with  the  func- 
tions and  powers  which  it  exercises,  accomplishing  what  it  might 
accomplish  to  reduce  the  abnormalities  of  cit}^  life.  While  areas  within 
the  city  remain  undeveloped  and  unserved  by  adequate  transporta- 
tion, toiling  thousands  find  themselves  dragged  out  miles  fartlier,  not 
to  gi-een  lawns  and  spaces,  but  to  a  repetition  of  the  same  ugly  con- 
gestion that  they  kiiow  in  the  city.  The  time  will  come  when 
emplo3'ers  and  educators  will  be  forced  to  take  cognizance  of  the 
impah-ment  in  working  efTicicncy  caused  by  such  inconveniences  as 
are  suffered  by  the  traveling  public  to-day.  The  time  is  approach- 
ing when  cities  will  find  it  necessary  to  extend  their  street  railways 
not  on  the  basis  of  new  property  values  or  the  earnings  of  j^ny  single 
line  of  r?uls,  but  on  the  basis,  primarily,  of  what  will  be  most  con- 
sistent with  the  pul)lic  health,  and  public  economy. 

These  motives  are  strongly  at  work  underneath  our  situation 
to-day.  The  public's  control  over  stock  issues,  service,  routes,  ex- 
tensions, etc.,  is  needed  to-day  not  only  in  order  that  as  part  of  a 
plan  for  restoring  the  credit  of  the  street  railways  the  community's 
interest  may  be  protected  by  the  guarantee  of  eificient  management, 
but  also  because  the  city  of  to-day  is  taldng  a  more  conscious,  con- 
structive interest  in  the  city  of  to-morrow.  That  interest  can  be 
recognized  and  cared  for  under  private  operation  if  the  public  au- 
thorities have  the  suggested  controls.  If  such  controls  do  not  come 
into  effective  existence,  then  one  of  the  strongest  forces  making  for 
municipal  ownership  will  continue  to  exert  an  increasing  inliuence. 

Yom-  Commission  trusts  that  this  principle  of  paying  wholly  or  in 
part  for  tho  construction  of  extensions  out  of  special  taxation  pf 
bent-fited  property  vrill  be  seriously  studied  and  adopted  where  pos- 
sible. It  seems  fundamentally  sound.  While  its  adoption  presents 
legal  difficulties,  as  has  the  adoption  of  many  another  ne^dy  recog- 
nized in.' us  trial-economic  relation,  it  holds  great  promise  for  reduc- 
ing the  fi  lanciai  problems  incident  to  public  transportation. 

Sectiox  XII. 

RATE  OF  RETURN. 

It  is  an  axiom  that  property  devoted  to  the  public  use  should 
secure  a  fair  rate  of  return.  Where  money  is  represented  by  bonds 
the  return  is  a  part  of  the  contract  and  is  not  changed  dming  the  life 
of  the  contract.  Where  capital  is  represented  bv  stock,  the  rate  of 
return  may  vary  according  to  the  operating  or  financial  conditions, 
and  naturally  it  should  compare  favorabl}'  with  the  income  upon 
other  classes  of  investment.  The  undisputed  testimony  i)roves  that 
the  rate  must  be  certain  as  well  as  reasonable  to  attract  capital  and 
that  the  absence  of  either  of  these  essentials  will  frighten  the  investor 
away.     It  may  be  a  lamentable  fact,  but  it  is  nevertheless  true,  that 


24  PROCEEDINGS  OF  FEDEEAL  ELECTRIC  RAILWAYS  COMMISSION. 

most  of  the  electric  railways  are  obliged  to  go  to  markets  outside  of 
tlicir  territory  to  sccm'e  new  capital;  and  under  existing  circum- 
stances the  investor  is  no  longer  willing  to  place  his  money  in  specu- 
lative properties.  The  experience  during  the  Avar  period  has  taught 
investors  that  a  fixed  franchise  fare  fails  to  meet  the  requirements  of 
the  industry  and  there  is  no  dissent  from  the  suggestion  that  such  a 
fixed  fare  is  a  relic  of  a  bygone  age.  lliere  are  certain  conspicuous 
examples  of  an  adherence  to  a  contract  fare  which  may  be  referred 
to,  but  they  do  not  affect  our  conclusion  that  the  rate  of  fare  must 
be  subject  to  prompt  revision  according  to  the  needs  of  the  par- 
ticular property. 

Section  XIII. 
REGULATION  OF  PUBLIC  UTILITIES. 

The  foundation  stone  of  the  relations  between  communities  and 
the  companies  must  be  the  local  authority  under  which  they  are  per- 
mitted to  conduct  business.  Since  practically  in  all  States  the  local 
government  alone  has  the  power  to  permit  the  use  of  highways  by 
electric  railways,  the  primary  authority  is  the  franchise  grant  or 
agreement  containing  the  permit.  Franchises  are  of  vaiying  terms 
and  conditions.  Until  recently  the  franchises  were  generally  limited 
to  a  certain  number  of  years,  but  now  it  seems  to  be  the  settled  con- 
viction that  such  contracts  are  inherently  imperfect.  A  reserve  fund 
set  aside  during  the  term  to  take  care  of  the  property  at  the  ex}nra- 
tion  of  the  franchise  would  result  in  increased  charges  for  services; 
and,  upon  the  other  hand,  the  failure  to  take  care  of  the  investment 
in  this  way  leaves  the  company  at  the  Avill  and  caj^rice  of  the  public. 
Instances  have  been  referred  to  in  this  record  where  the  railways  are 
having  difficulty  in  securing  nev/  franchises,  while  in  some  communities 
there  seems  to  be  a  disposition  to  take  over  the  property  for  junk 
values.  Under  these  conditions  it  is  natural  for  the  company  to 
neglect  maintenance  and  give  poor  service.  From  the  evidence  it 
appears  that  there  will  be  difficulty  hereafter  in  securing  new  capital 
for  properties  that  are  governed  by  such  franchises. 

The  undisputed  testimony  favors  an  indetciininate  franchise  by 
which  the  company  is  permitted  to  operate  subject  to  the  right  of  the 
public  to  take  over  the  proper t}^  by  paymg  its  value  or  agreed  price. 
Such  contracts  protect  both  the  investment  against  confiscation  and 
the  public  against  extortion  by  providmg  for  payment  of  just  com- 
pensation for  the  use  of  the  property.  The  indetermijiate  franchise 
has  been  most  thoroughly  developed  in  the  State  of  Wisconsin,  and 
it  has  been  recognized  m  the  District  of  Columbia,  and  the  States  of 
Indiana  and  Massachusetts.  Its  earlier  adoption  by  other  States 
and  communities  would  have  prevented  many  conflicts  and  misunder- 
standings. We  })elieve  that  this  form  of  franchise  should  receive  the 
favorable  consideration  of  tlie  public. 

Prior  to  1907  the  regulation  of  electric  railways  was  principally 
confined  to  the  municipalities.  The  history  of  this  industry  is 
replete  with  examples  where  municipal  corruption  has  resulted  from 
this  control.  The  street  railway  is,  however,  essentially  a  local  insti- 
tution and  it  can  not  permanently  prosper  unless  it  has  the  confi- 
dence and  cooperation  of  the  public  which  it  serves. 

Since  1007  many  States  have  taken  over  the  control  and  regulation 
of  this  service  and  the  communities  within  those  States  have  been 


PROCEEDINGS  OF  FEDERAL  ELECTRIC  RAILWAYS  COMMISSION.         25 

deprived  of  all  jurisdiction.  While  the  evidence  shows  that  exclu- 
sive State  control  is  preferable  to  exclusive  municipal  control,  yet 
there  appears  to  be  a  happy  middle  ground  by  which  the  municipali- 
ties may  exercise  control  of  the  things  that  are  peculiarly  within  their 
province,  and  the  State  retain  jurisdiction  over  all  other  matters  and 
also  exercise  supervision  over  the  action  of  the  local  tribunals.  No 
general  rule  would  fit  all  cases. 

We  have  street  railways  which  do  not  extend  beyond  the  limits  of 
a  city,  others  where  two  or  more  systems  operate  "in  the  same  city, 
white  frequently  a  single  company  operates  in.  through,  and  between 
a  largo  number  of  cities  and  villages.  In  New  Jersey  one  svstem 
serves  practi(udly  the  whole  State,  and  the  same  condition  exists  in 
Connecticut.  Manifestly  no  rule  of  thumb  can  apply  to  these 
difl'erent  conditions.  The  tendency  is  to  extend  the  mileage  and 
service  of  street  railways  and  to  unite  different  companies  under  one 
management,  and  as  our  cities  and  villages  grow  and  tlie  rural 
country  becomes  more  populous  and  prosperous  these  electric  rail- 
ways M'ill  extend  their  lines  to  meet  the  growing  demands.  Under 
such  conditions  safety,  efficiency,  and  economy  will  be  promoted  by 
extending  to  a  superior  regulatory  board  the  control  of  the  practices, 
rules,  regulations,  security  issues,  the  system  of  accounts,  and  the 
charires  to  be  paid  for  the  service. 

Elective  local  control  is  well-nigh  impossible  where  a  single  com- 
pany spreads  out  over  an  entire  section  of  the  State  and  this  condition 
even  constitutes  a  serious  obstacle  to  municinal  ovniership.  Wliere 
the  street  raihvay  company  operates  wholly  within  one  city  there 
can  be  no  insuT)erable  objection  to  exclusive  municipal  control,  wlien 
the  people  are  re«dy  and  willing  to  exercise  it.  Secretary  Baker 
testified  upon  this  point  as  follows: 

Because  I  think  the  responsibility  for  the  management  of  its  own  affairs  is  the 
greatest  educational  influence  that  the  city  of  Cleveland  has.  The  fact  that  the  people 
of  the  city  had  -^tuaied  and  grasped  and  solved  an  intricate  and  complicated  problem 
like  the  street-railway  problem  has  made  them  a  more  self-conscious  and  a  stronger, 
more  virile  people  tlian  they  were  before  that  problem  was  put  up  to  them;  and  I 
should  be  very  sorry  indeed  to  see  the  responsibility  for  theii-  own  ailairs  in  as  intimate 
and  important  matter  as  street-railway  service  taken  away  and  transferred  to  a  State 
agency. 

Cleveland  has  made  a  more  extensive  study  of  the  electric  railway 
problem  than  any  other  city  in  the  country.  Intelligent  regulation 
can  not  be  secm-ed  without  the  assistance  oi  expert  operative,  statis- 
tical, and  engineering  departments,  and  these  are  expensive  items  in 
any  municipal  budget. 

In  some  resj^ects  uniformity  is  not  only  desirable  but  essential. 
This  applies  to  the  control  of  seciu'ity  issue*,  to  accounting,  the  study 
and  determination  of  depreciation  and  the  control  of  such  funds, 
fixing  reason a))le  maintenance  standards  and  their  enforcement,  and 
the  methods  and  principles  to  be  employed  in  valuing  properties, 
either  for  rate  making,  capitalization,  condemnation,  or  purchase. 
In  a  general  v/ay,  the  rules  and  principles  which  may  be  applied  to 
the  electric  railway  industry  will  be  found  available  for  other  utilities, 
such  as  telephone,  electric  light,  heating,  power,  and  gas  and  water 
companies.  In  our  judgment  the  State  public  service  commissions 
should  determine  finally  these  matters,  subject,  of  coui-se,  to  an 
appeal  to  the  courts  where  they  err  in  judgment  or  transgress  the  law. 


26         PKOCEEDINGS  OF  FEDEEAL.  ELECTRIC  RAILWAYS  COMMISSION. 

Kegiilation  by  municipalities  should  bo  subject  to  an  appeal  to  the 
State  public  service  commission,  tlius  bringing  to  bear  upon  the  ques- 
tion involved  the  judgment  of  a  body  of  men  somewhat  aloof  from 
local  influences.  This  would  place  the  final  authority  in  the  .State, 
and  surely  the  communities,  which  are  l)ut  subdivisions  of  the  State, 
shoidd  prefer  to  submit  their  cause  to  a  State  tribunal  in  preference 
to  a  court,  wliich  rarely,  if  ever,  has  any  regulating  experience. 

Theoretically,  State  control  is  removed  from  the  influence  of  com- 
munity prejudices.  It  certainly  exercises  its  functions  with  a  more 
judicial  attitude,  and  with  greater  equity  to  both  the  communities 
and  the  companies;  probably  it  is  in  most  instances  more  economical 
and  more  efficient,  since  the  State  can  create  a  better  and  more  com- 
prehensive organization  for  regulation  at  less  cost.  State  control 
obviates  conflict  of  authority  between  communities  that  is  bomid  to 
obtain  when  utilities  operate  beyond  the  limits  of  a  single  munici- 
pality. It  makes  unnecessary  the  erection  of  metropolitan  or  public 
utility  districts  in  order  to  secure  uniform  regulation,  and  it  also 
results  in  a  large  saving  to  single  communities  which  would  other^vise 
be  obliged  to  maintain  its  expert  departments  to  perform  this  service. 

The  possibility  of  combining  the  best  features  of  State  and  local 
regidation  through  a  division  of  powers  and  duties  was  suggested  by 
several  witnesses  and  has  been  carefully  considered  by  this  Commis- 
sion. It  would  seem  to  be  desirable  to  leave  to  the  communities,  at 
least  in  the  firet  instance,  the  determmation  of  such  questions  as  the 
assignments  of  streets  upon  which  the  railways  may  operate,  ques- 
tions involving  speed,  stops,  schedules,  rerouting  of  cars,  and  service 
during  peak  hours  and  otherwise,  the  extension  of  tracks,  rate  of  fare, 
and  the  securing  of  certain  statistical  information  where  such  informa- 
tion does  not  d^iroctly  interfere  with  the  accounting  rules  which  have 
been  prescribed  b}^  the  State.  Under  these  conditions  the  cities 
would  be  compelled  to  take  a  chrect  interest  in  the  transportation 
business,  leading  to  a  more  wholesome  cooperation  between  tne  public 
-and  the  railways.  We  believe  this  principle  is  worth  trying,  because 
it  places  the  initial  regulating  rosponsibijity  upon  the  community, 
thus  leaving  the  way  open  for  sympathetic  understanding  and  coop- 
eration between  the  public  and  the  industry,  without  which  the 
industry  can  not  survive,  and  yet  places  the  flnal  responsibility  upon 
the  State,  which  is  best  equipped  to  determine  the  questions  involved 
in  a  sane,  consistent,  and  impartial  manner. 

In  a  number  of  States  commissions  now  have  complete  authority 
over  all  cpiestions.  There  should  be  no  change  if  the  people  are  satis- 
fied with  that  policy.  It  has  unquestionably  Avorked  w^ell  in  most  of 
these  States.  We  do,  however,  desire  to  emphasize  our  belief  that 
any  form  of  regulation  will  fail  of  its  ]:)urpose  if  it  does  not  secure 
public  coo])eration  in  the  conduct  of  the  utility.  Our  study  of  con- 
ditions as  they  exist  in  the  principal  cities  of  the  country  has  shown 
that  unless  the  public  is  in  sympathy  with  the  purposes  of  the  nian- 
agement  and  lends  assistance  in  their  acliievement,  neitlun-  efficient 
nor  econcmical  service  is  possible.  Cooperation  can  not  be  obtained 
unless  the  public  be  informed  as  to  aU  pliases  of  the  electric  railway 
problem — financial,  economical,  and  operating — and  will  not  bo  con- 
tinued unless  the  process  and  information  is  continued.  This 
psychological  factor  involves  a  continuing  task  of  undoubted  magni- 
tude, but  whatever  the  regulatory  authority  may  be,  and  however 


PROCEEDINGS  OF  FEDERAL  ELECTRIC  RAILWAYS  COMMISSION.         27 

g:reat  the  difTiciiltics,  the  duty  involved  must  he  performed  if  the  i-eJa- 
tions  of  the  piihlic  and  these  highjy  essential  utilities  are  to  bo  main- 
tained upon  a  basis  that  will  insure  })roper  service. 

The  electric  railway  problems  admit  of  a  satisfactory  solution  onco 
the  elements  that  compose  them  are  made  known  and  the  process  of 
ordinary  economic  and  nusiness  common  sense  are  applied.  The  duty 
of  both  the  public  authorities  and  those  who  control  the  electric  rail- 
way cnter])i'ises  of  the  country  is  plainly  indicated.  The  time  has 
come  for  a  permanent  and  satisfactory  settlement  of  the  traction 
question.  Tlio  interests  of  both  the  public  and  the  com})anies  lie  so 
exactly  paralJel  in  almost  every  respect  that  thei-e  ought  not  to  be 
any  serious  difficulty  in  arriving  at  a  solution  if  both  parties  approach 
the  subject  in  a  proper  spirit. 

Section  XIV. 

service-Xt-cost  plans. 

The  electric  railways  have  responded  to  the  improvements  in  the 
arts  and  sciences,  and  it  may  also  be  said  that  the  science  of  regula- 
tion has  fairly  kept  pace  with  the  requirements  of  public  service  and 
the  growth  of  the  industry.  Franchises  have  been  the  result  of 
experiment.  The  contract  fare  established  an  unsound  rate  basis, 
and  in  some  instances  commissions  were  slow  to  reach  conclusions 
in  rate  cases.  Investors  lost  confidence  in  the  electric-railway  busi- 
ness. It  was  thought  that  a  contract  must  be  evolved  which  would 
meet  all  the  requirements  of  the  industry  as  well  as  of  the  public. 
Thus  came  the  cost-of-service  contract.  It  has  worked  well  in  Cleve- 
land dm'ing  the  most  difficult  period  in  the  history  of  the  industry. 
It  seems  to  have  worked  fairly  well  in  the  other  cities  where  it  has 
been  tried  out,  and  to  justify  the  following  statement  made  by 
Secretary  Baker: 

I  believe  that  any  community  in  America  -will  pay  cheerfully  and  willingly  what- 
ever rate  of  fare  is  necessary  to  carry  the  people  on  their  street  railroads,  and  to  main- 
tain good  serA-ice  in  their  communities,  if  they  are  sure  that  they  are  paying  only 
proper  operating  expenses,  proper  maintenance,  and  a  proper  return  on  capital. 

Practically  all  of  the  witnesses  for  the  electric-railway  industry 
favored  service-at-cost  franchises.  That  service  should  be  provided 
at  cost  is  not  a  new  principle  in  the  regulation  of  public  utilities. 
It  is  back  of  all  public  service  commission  regulation,  and  expresses 
the  reaction  from  the  original  contractual  relations  between  utilities 
and  communities,  under  which  fares  were  fixed  and  limited,  wliile 
return  was  not.  The  apphcation  of  the  term  "service  at  cost"  in 
recent  working  agreements  between  the  electric  railways  and  the 
cities  of  Cleveland,  Cincinnati,  Dallas,  Montreal,  and  to  a  limited 
extent  the  city  of  Boston,  does  not  clearly  describe  such  agreements. 
They  are,  in  effect,  devices  for  automatically  and  quickly  adjust- 
ing price  to  cost.  It  is,  therefore,  not  so  much  the  principle  back 
of  such  plans  as  it  is  the  method  provided  for  carrying  that  principle 
out  that  concerns  the  Commission  in  this  phase  of  the  traction  prob- 
lem. Without  going  into  unnecessary  detail,  it  will  suffice  to  state 
that  the  main  features  of  the  contract  are: 

(a)  Fair  valuation  of  the  property. 

(b)  Capitalization  to  conform  thereto. 

(c)  Agreed  return  upon  capital. 


28         PROCEEDINGS  OF  FEDEEAL  ELECTRIC  RAILWAYS  COMMISSION. 

((I)  Public  control  of  capital  issues,  and,  to  a  certain  extent,  over 
expenditures. 

(e)  Public  supervision  over  management,  operation,  and  service. 

(f)  Automatic  changes  of  rates,  to  meet  fluctuating  economic 
conditions,  and  to  insure  a  proper  return  on  the  value. 

(g)  Private  operation,  subject  to  the  right  of  the  municipality  to 
purchase  the  property  at  its  value,  or  upon  an  agreed  price. 

(h)  Reduction  of  taxes  and  assessments. 

The  service-at-cost  contract  is  still  in  its  experimental  stage,  and 
naturally  a  number  of  criticisms  have  been  made  of  it.  These  have 
been  considered,  but  with  the  limited  experience  under  this  contract 
we  believe  that  the  criticisms  are  more  theoretical  than  real.  If 
these  defects  prove  to  be  substantial  and  result  in  unduly  increasing 
the  cost  of  service,  they  can  be  removed  by  improved  regulation, 
but  if  they  can  not  finally  be  avoided,  then  it  would  seem  that  the 
public  has  ample  protection  in  the  contract's  purchase  provisions. 

Generally  speaking,  the  main  criticism  of  this  form  of  contract  is 
that  it  tends  toward  inefficiency  and  uneconomic  operation;  that  it 
contains  no  provision  for  the  control  of  strikes,  or  uninterrupted 
service;  and  that  labor  and  management  may  cooperatively  increase 
the  cost  of  operation  to  the  point  where  the  public  may  be  unduly 
burdened. 

From  the  point  of  view  of  credit  restoration,  the  outstanding 
advantage  of  this  contract  is  that  rates  are  automatically  adjusted 
to  meet  changing  operating  conditions.  We  are  inclined  to  think 
that  the  assurance  of  an  automatic  adjustment  of  fare  will  do  more 
than  anything  else  to  restore  the  confidence  of  the  investor  in  these 
properties.  Pul)Iic  confidence  will  be  immeasurably  strenghtened 
through  the  valuation  of  the  properties,  because  the  figure  that  is 
established  constitutes  the  basis  of  the  return  to  the  investor,  and 
fixes  at  least  the  minimum  price  which  the  public  will  be  obliged  to 
pay  if,  at  some  future  time,  it  should  decide  to  purchase  and  operate 
the  property.  Vvlien  the  value  is  thus  fixed,  there  can  be  no  further 
dispute  as  to  capitalization  or  excessive  profits,  because  the  people 
will  know  just  v/hat  they  arc  paying  for.  The  controlling  element  in 
its  favor  is  the  restoration  of  ])u})lic  confidence  in  the  corporation, 
due  to  the  removal  of  those  elements  of  friction  which  have  so  fre- 
quently engaged  the  attention  of  the  public.  It  might  also  be  said 
that  to  a  certain  extent  it  removes  the  railways  from  the  idea  of 
speculative  gain,  and  places  tliem  upon  a  common-sense  business 
basis  where  the  people  pay  for  the  service  they  get,  and  where  the 
opportunity  for  large  profits  no  longer  exists,  since  economies  and 
lower  operating  costs  are  reflected  in  reduced  charges  for  service. 
When  the  contract  is  once  establislied,  the  opportunity  for  municipal 
corruption  is  reduced  to  the  miifimum. 

We  strongly  recommend  the  principles  of  the  servicc-at-cost  con- 
tract, not  as  the  only  solution,  but  as  one  means  of  solving  a  very 
difficult  problem. 

In  cases  where  the  electric  railways  operate  in  more  than  one 
municipality  and  between  dilTerent  munici])ahties,  such  service-at- 
cost  contracts  can  properly,  in  our  judgment,  be  made  only  with  the 
public-service  commission,  and  in  sucii  cases  the  provisions  of  the 
contract  should  a])ply  in  any  })articuhxr  community  to  the  system  as 
a  whole  rather  than  to  its  individual  parts. 


PROCEEDINGS  OF  FEDERAL  ELECTRIC  RAILWAYS  COMMISSION.         29 

Section  XV. 
PUBLIC  OWNERSHIP  AND  OPERATION. 

It  is  urged  by  many  that  public  rcg-ulation  of  the  street  railways  has 
failed,  and  that  the  pronerties  should  be  taken  over  by  the  munici- 
palities or  the  Stjvte.  Dr.  Dcloa  F.  Wilcox  concluded  his  able  and 
interesting  analysis  of  the  testimony  given  in  this  connection  with 
that  suggestion.  wSomo  members  of  the  (l^ommission  indi\'idually 
feel  that  eventually  municipal  ownership  might  prove  generally 
desirable  and  that  there  may,  perhaps,  be  commimities  in  the  United 
States  in  which  on  account  of  the  responsibility  of  the  local  govern- 
ment and  the  acuteness  of  the  present  conditions,  municipal  owner- 
ship should  be  resorted  to.  The  experience  of  Boston,  wSan  Francisco, 
and  Seattle  arc  being  watched  with  great  interest,  but  they  have  not 
continued  long  enough  to  justify  any  conclusion  as  to  the  relative 
merits  of  public  as  against  private  operation.  The  Commission  is 
unanimous  on  this  point:  That  there  lias  not  been  suflicient  experi- 
ence with  public  ownership  and  operation  of  street  railways  in  this 
country  to  enable  us  to  recommend  it  as  a  permanent  solution  of  this 
problem.  In  some  of  the  foreign  countries  it  has  appai'ently  worked 
well.  We  do  not  believe  under  present  conditions  tnat  this  method 
of  operation  would  be  successful  in  most  of  the  cities  of  the  United 
States  to-da}'. 

Aside  from  the  serious  question  whether  municipalities  as  at  pres- 
ent organized  can  operate  electric  raihvays  as  efficiently  and  satis- 
factorily as  private  enterprises,  our  conviction  upon  tins  subject  is 
based  upon  the  great  political  difficulties  Vviiich  y,-ouid  ha,ve  to  be 
overcome,  such  as  constitutional  amendment,  legislation,  and  tlie 
fiscal  burdens  incident  to  the  purchase  by  cities  of  gi-eat  public 
utilities,  and  upon  the  further  fact  that  in  many  sections  of  the 
country  the  lines  of  the  railway  extend  tlirough  many  cities  and 
villages  and  into  rural  territory.  It  is  assumed,  however,  that  these 
latter  diiTiculties  could  be  mastered  by  a  community  thoroughly 
awakened  to  the  necessity  for  such  a  change. 

We  a,re  certain  that  much  can  be  accomplished  by  private  initiative, 
stimulated  and  aided  by  thorough  public  regulation;  that  the  final 
solution  could,  in  many  communities,  be  found  under  private  man- 
agement, and  that  in  any  event,  the  reforms  v.'hich  have  been  urged 
by  the  Commission  should  be  mstituted,  since  those  reforms  would 
serve  to  place  the  relations  between  the  street  railway  and  the  public 
upon  a  more  just  and  equitable  basis. 

Conclusion. 

We  have  conceived  the  sQope  of  this  inquiry  to  be  to  ascertain, 
first,  the  actual  financial  and  service  conditions  of  the  electric  rail- 
ways of  the  United  States  at  the  present  time;  second,  the  causes 
which  have  contributed  to  such  conditions;  tliird,  what  readjust- 
ments of  the  relations  between  the  electric  railways  and  the  commu- 
nities which  they  serve  must  be  brought  about  in  order  to  restore  the 
confidence  of  the  public  and  to  put  the  companies  upon  such  a  finan- 
cial basis  for  the  future  as  will  enable  them  to  render  conthmous  and 
efficient  service  to  their  respective  communities. 

We  have  not  entered  into  a  mmute  discussion  of  the  different 
franchise  provisions  throughout  the  country,  nor  have  we  under- 


30  PROCEEDINGS  OF  FEDERAL  ELECTRIC  RAILWAYS  COMMISSION. 

taken  to  suggest  any  details  which  should  he  incorporated  into  any 
new  contract,  but  have  preferred  to  confine  ourselves  to  suggesting 
the  br(>ad  outlmes  of  such  new  relations. 

The  Commission  is  not  pessimistic  as  to  the  future.  The  electric- 
railway  problem  admits  of  a  satisfactory  solution,  once  the  elements 
that  compose  it  are  made  Iviiown  and  the  principles  of  ordinary 
economic  and  busuiess  common  sense  are  applied. 

The  dut.y  both  of  the*public  authorities  and  of  those  who  control 
the  electric-railway  enterprises  of  the  country  is  plainly  indicated. 
The  time  has  come  for  stable  and  satisfactory  settlements  of  traction 
difRculties. 

The  Commission  can  go  no  further  than  to  point  out  the  principles 
upon  which  readjustment  should  be  based.  The  task  is  really 
that  of  the  State  and  local  authorities  upon  the  one  hand,  and  of  the 
companies  uDon  the  other.  Failure  to  rehabilitate  the  industry  and 
the  service  is  possible  only  if  those  upon  whom  the  responsibility 
rests  fail  to  undertake  the  work  or  pursue  it  in  a  spirit  that  makes 
settlement  impossible. 

Respectfully  submitted  this  2Sth  da}'  of  July,  1920. 

Charles  E.  Elmqulst,  Chairman. 
Edwin  F.  Sweet,  Vice  Chairman. 
P.  H.  Gadsden. 
W.  D.  Ma  HON. 
Royal  Meeker. 
C.  W.  Beall. 
Louis  B,  Weiiie. 
George  L.  Baker. 

O 


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